michael t. childress 1994cigarette consumption, declining levels of domestic content in u.s....

The Future ofBurley Tobacco:

Potential Outcomes,Points of Leverage and

Policy Recommendations

MICHAEL T. CHILDRESS

1994

7+(�.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

iii

PREFACE

This report identifies and suggests some potential outcomes over the next 10 years of variousfactors that are likely to affect the future of burley tobacco. These trends include, but are notlimited to, increasing taxation on cigarettes at the state and federal levels, decreasing domesticcigarette consumption, declining levels of domestic content in U.S. manufactured cigarettes, andthe increasing abundance of high quality (relatively cheap) burley in the world market. Thesetrends are important to Kentucky because they can affect future burley quotas, which can haveserious economic and social consequences for Kentucky’s tobacco growing communities.However, Kentucky’s policymakers can exercise varying degrees of leverage over these factors.Accordingly, we offer recommendations on courses of action.

The bulk of the research for this report was conducted during the spring of 1994 -- a period ofturmoil and uncertainty for the tobacco industry. Since the release of the initial draft of thisreport, a series of important events have occurred that could significantly impact future burleyquotas. For example, laws affecting tobacco imports have changed, national health care reform -- and a possible tax increase on cigarettes -- is defunct for the current session of Congress, and aCongressman from North Carolina has submitted a proposal that includes a provision to abolishthe tobacco price support system.

Consequently, any forecast of the future burley quota is fraught with uncertainty. It is difficultindeed to determine what will happen over the next ten years. The results of this analysis arebased on expert opinion gleaned from the vantage point of spring 1994. While it is impossible tobe certain about the course of future events, one thing seems certain: the “tobacco industry” ison the decline -- the uncertainty centers on the magnitude of that decline.

.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

The Kentucky Long-Term Policy Research Center was created by the General Assembly in 1992to bring a broader context to the decision-making process. The Center's mission is to illuminatethe long-range implications of current policies, emerging issues, and trends influencing theCommonwealth's future. The Center has a responsibility to identify and study issues of long-term significance to the Commonwealth and to serve as a mechanism for coordinating resourcesand groups to focus on long-term planning.

Governing the Kentucky Long-Term Policy Research Center is a 21-member board of directorsthat includes four appointees from the executive branch, six from the legislative branch, and 11at-large members representing citizens groups, universities, local governments, and the privatesector. From the at-large component of the board, six members are appointed by the Governorand five by the Legislative Research Commission. In accordance with its authorizing legislation,the Center is attached to the legislative branch of Kentucky state government. The makeup of itsboard, however, affords it functional independence and permits it to serve both the executive andlegislative branches of government equally, as well as the public.

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Michael T. Childress is the executive director of the Center. Those interested in furtherinformation about the Kentucky Long-Term Policy Research Center should contact his officedirectly:

Kentucky Long-Term Policy Research Center Sullivan Square, Suite 100

215 West Main StreetFrankfort, KY 40601

v

CONTENTS

PREFACE.................................................................................................................................................. iii

CONTENTS .............................................................................................................................................. v

SUMMARY............................................................................................................................................... vii

GLOSSARY .............................................................................................................................................. xiii

ACKNOWLEDGMENTS ......................................................................................................................... xv

RATIONALE............................................................................................................................................. 2

APPROACH AND PURPOSE .................................................................................................................. 13

FACTORS AFFECTING BURLEY’S FUTURE....................................................................................... 18

ALTERNATIVE SCENARIOS................................................................................................................. 20

ECONOMIC AND SOCIAL IMPLICATIONS ........................................................................................ 29

POLICY RECOMMENDATIONS............................................................................................................ 37

ENDNOTES .............................................................................................................................................. 57

APPENDIX A............................................................................................................................................ 59

APPENDIX B............................................................................................................................................ 60

APPENDIX C............................................................................................................................................ 63

APPENDIX D............................................................................................................................................ 71

APPENDIX E ............................................................................................................................................ 87

SELECTED BIBLIOGRAPHY................................................................................................................. 91

vii

SUMMARY

"There is no one big thing Kentucky farmers cando to offset the loss of foreign markets fortobacco, but there are many little things theycan do that in the aggregate will save them."

- Dr. Thomas P. Cooper, Dean of the University of Kentucky College of Agriculture, July 1940

Background

Tobacco’s importance to the Commonwealth of Kentucky cannot be adequately understood bysimply reciting the statistics on the number of tobacco farmers or tobacco’s contribution to thestate’s gross product. Although these numbers are, in themselves, quite impressive, they do notreveal the extent to which tobacco is interwoven into the basic fabric of the state’s history,culture and ethos. Indeed, tobacco is much more than a $1 billion a year economic activity thatemploys nearly 100,000 Kentuckians.

Tobacco is, in fact, an essential element in the cycle of Kentucky life, and forms an importantthread of continuity with previous generations. While the technology surrounding the tobaccoindustry has changed, the basic activity has remained fundamentally the same for generations. Inthe same way that his great-great-grandfather spent his spring preparing plant beds and his winterstripping tobacco, today’s tobacco farmer is connected in an intimate and fundamental way to hisancestors as he engages in the same activities, frequently cultivating the same land, andsometimes even using the same tobacco barns.

Kentucky’s social, economic and cultural fabric, however, is beginning to show the strain fromthe increasing pressure placed on tobacco by several forces. As a way to help finance nationalhealth care reform, proposals have been made to substantially increase the federal excise tax oncigarettes. This could, if enacted, significantly reduce cigarette consumption, and therebyaccelerate its downward trend in the United States. Moreover, while cigarette exports haveexperienced annual 15 percent increases for five of the last seven years, this trend will assuredlyslacken as international competitors continue to produce high quality burley at low prices.Domestic content legislation, which took effect in January 1994, will help to stabilize tobaccoquotas in the face of these pressures. At the same time, however, this legislation could result in aloss of jobs if value-added operations, like cigarette manufacturing, are moved to foreignlocations to escape the requirements of the legislation. Meanwhile, research and developmentinto extended uses for tobacco offer a ray of hope that innovative uses will spur new industriesand cushion the downward pressure on tobacco quotas.

Purpose

The purpose of this research project is fivefold: (1) identify the factors that are affectingtobacco’s future; (2) ascertain their likely outcome over the next 10 years; (3) delineate theirpotential consequences on future burley quotas; (4) understand the economic implications of a

viii

changing burley quota; and (5) develop recommendations for policymakers that facilitate a bestcase scenario and hedge against a worst case scenario.

Research Approach

An extensive survey of the existing literature on the issues pertinent to the future of tobacco wasconducted. Then, tobacco experts throughout the country were interviewed and asked tocomplete a questionnaire (7 experts were farm organization leaders, 6 were U.S. Department ofAgriculture experts in the production and marketing of tobacco, 5 were university faculty withspecialized knowledge of tobacco, 2 were economists working for (Kentucky) state government,2 were agriculture specialists within (Kentucky) state government, 2 were with a tobaccoadvocacy and research organization, 1 was a private agriculture consultant, 1 was a tobaccowarehouseman, and 1 was anonymous). The interviews and surveys were conducted during thespring of 1994.

The data collected from the interviews and surveys were used to identify the factors affectingtobacco and to estimate their likely outcome over the next 10 years. Multiple scenarios regardingKentucky’s future burley quota were constructed based on the anticipated trajectories of thefactors affecting it. This method helps to identify the points of leverage in the tobacco system(i.e., which factors have the biggest impact on the system and which factors can be changed) sothat recommendations can be offered to policymakers on courses of action.

Results

The alternative scenarios generated in this analysis focus principally on future quotas andimplicitly assume that price support levels will remain relatively static. This is because growershave typically shown a preference to maintain price at higher levels and accept lower quotaswhen faced with pressure to accept either lower price support levels or lower quotas. This hasnot, however, always been the case, and the experience of the mid-1980s illustrates how growershave been willing to accept lower price supports in one instance. Indeed, many in the tobaccoindustry have suggested that the same could happen during the mid-1990s.

As a result, these alternative scenarios should be viewed as what could happen to future quotasgiven circumstances and expectations prevalent during the spring of 1994. These scenariosshould not be viewed as the definitive and inclusive range of all possible outcomes. Obviously,if the Chinese market suddenly opened in a significant way to non-Chinese cigarettes (currentlythe Chinese market is largely closed to U.S. cigarette imports) then quotas in ten years could beat least as high as they are today -- or even higher. At the same time, if the Food and DrugAdministration (FDA) takes action to significantly regulate cigarettes, then quotas could besubstantially lower in ten years than those estimated in this analysis. Likewise, other eventscould occur, like major changes in the tobacco program or price support level, that couldsignificantly alter the course of events. Presumably though, the probability of some of theseevents occurring should be implicitly captured by the “delphi approach” of soliciting expertopinion. For example, an expert forecast of future cigarette exports would certainly reflect theanticipation of changes in the status of the Chinese market access to U.S. produced cigarettes.

While there are many possible outcomes over the next decade for Kentucky's burley quota, thisanalysis suggests that significant structural factors will likely depress Kentucky's basic burleytobacco quota by around 40 percent over the next ten years -- resulting in the loss of 10,000 to24,300 jobs. Moreover, a decline of this magnitude is likely to occur even without a significant

ix

increase in the federal excise tax on a pack of cigarettes. The economic and social impact willbe felt unevenly across Kentucky, with certain "tobacco dependent" communities especially hardhit. Nevertheless, Kentucky’s policymakers can mitigate the potentially deleteriousconsequences of a declining burley tobacco quota.

Other noteworthy findings from an informal survey of tobacco experts include:

• Over 95% feel that there will be an increase in the federal excise tax on a pack ofcigarettes. The consensus feeling is that this increase will be about $0.50;

• Almost 60% think that the tobacco growing states can obtain a portion of the fundsgenerated by an increase in the excise tax in the form of a "tobacco rebate." Most feelthat the likely percentage returned to the tobacco states would be around 3%;

• Nearly 90% of the experts believe that the domestic content legislation will not lastbecause it is likely to be ruled inconsistent with the free trade provisions of the GeneralAgreement on Tariffs and Trade;

• Approximately 75% of the experts anticipate that the manufacturers will move cigarettemanufacturing operations "off-shore" as a result of the domestic content legislation.They also believe that significantly less U.S. grown leaf will be used in these cigarettesafter production is moved "off-shore";

• Over 50% believe there is a "moderate" to "very high" probability that the tobacco pricesupport system will be abolished within 10 years; and

• Almost 50% believe there is a "moderate" to "high" probability that foreign grown burleywill match the quality of Kentucky burley within the next 10 years.

Policy Recommendations

Kentucky’s policymakers and tobacco communities can simultaneously work to keep the burleyquota as high as possible and attempt to cushion the blow of declining quotas by helping farmersdiversify. Accordingly, we offer the following policy recommendations:

• Work to enact legislation to have domestic content labeled on a package of cigarettes.Approximately 50 percent of Kentucky’s burley is used in the production of cigarettesthat are consumed in the United States. Unsurprisingly then, the level of domesticcontent in cigarettes exercises substantial influence over Kentucky’s burley quota.However, the domestic content legislation that took effect in January 1994, which isdesigned to increase the level of U.S. grown tobacco leaf in cigarettes, will likely beruled inconsistent with the free trade provisions of the General Agreement on Tariffs andTrade (GATT). Pressure will then mount on the United States to abolish this legislation.While some elements of this legislation might legally remain intact under Article 28 ofGATT, many believe that this legislation is accelerating the movement of cigaretteproduction "off-shore." One consequence of a "shift" from the United States to foreignlocations is the likelihood that significantly less domestically grown tobacco will be usedin cigarette production. The same desired end (i.e., increasing domestic content) can beachieved through market forces if burley groups can capitalize on their comparativeadvantage of higher quality leaf, but this can only be done if domestic content is labeledon a pack of cigarettes.

• Create a consortium of tobacco producing states to market leaf exports. About 30percent of Kentucky’s burley is exported as unmanufactured leaf. As a result, the level ofleaf exports exerts a major influence over Kentucky’s burley quota. Until a few years

x

ago, the federal government provided this service under the Market Promotion Program.The tobacco producing states should fund market promotion programs to achieve thispurpose. Also, Kentucky should consider a Farm Bureau recommendation to providefunding for an economist "to study and determine potential foreign market areas forKentucky grown tobacco" (Kentucky Farm Bureau Policies, 1994).

• Fund research and development that is focused on extended uses for the tobacco plant.The tobacco plant holds tremendous potential as a source of high grade protein and as atool for molecular biologists in bioengineering. While few believe that these extendeduses will mature sufficiently over the next decade to significantly help tobacco farmers,there appears to be enough promise in these areas to warrant future research anddevelopment. Policy-makers should encourage this type of research at the state’suniversities by ensuring that funding is channeled in the necessary directions.

• Facilitate farm diversification. There is no single crop that can replace lost tobaccoincome. There are, nevertheless, opportunities available to farmers wishing to diversify.For example, conventional crops and livestock can be used to partially offset lost tobaccoincome. Moreover, supplemental crops and animal products, including, but not limitedto, fruits, vegetables, aquaculture and specialty products can be pursued. A fundamentalobstacle to farm diversification is a suitable infrastructure necessary for transporting,storing, and selling fruits and vegetables. Policymakers can help facilitate farmdiversification by targeting rural development funds toward several differentinfrastructure investments. Some basic examples include coolers, storage facilities, andtrucks to haul produce to markets. A specific example would include the proposedfarmers’ market in Northern Kentucky. By ensuring that projects such as this reachfruition, the state can play a positive role in facilitating farm diversification.

• Develop a framework to increase local purchases. Over 70 percent of the foodconsumed in Kentucky is brought in from outside the state. A significant marketingeffort would be required, but Kentucky’s farmers can help satisfy some of this consumerdemand if the proper framework is developed. Policymakers can help develop aframework to increase local purchases by facilitating farm diversification and fundingprograms like farmers’ markets and fruit/vegetable cooperatives. Moreover, the state canalso engage in a "Buy Kentucky" campaign to publicize the benefits of increasing localpurchases. Some of the ancillary benefits would include increased agriculturalsustainability, higher "vegetable income" for Kentucky’s farmers, fresher products forKentucky’s consumers, and ultimately a strengthening of Kentucky’s rural economies.

• Work to develop farm commodity exports. In 1992, Kentucky exported $879 million inagricultural products, which is equivalent to 27% of the state’s agricultural production.Unfortunately, while U.S. exports increased by 12% from 1991 to 1992, Kentucky’sexports remained static. The largest increases on a national level were seen in wheat,soybeans, and live animals, and Kentucky has considerable opportunity for increasedproduction in each of these areas. Accordingly, Kentucky’s policymakers should ensurethat Kentucky’s agricultural strategic development plan, Ag. Project 2000: AComprehensive Master Plan for Kentucky Agricultural Economic Development, receivesadequate attention and support.

xi

• Focus attention on those communities especially vulnerable to a significant decline inthe burley quota. Some geographic areas of the Commonwealth will suffer severeeconomic distress as a result of a significant long-term decline in the burley quota. Stategovernment should recognize that these communities are in need of special assistanceand extraordinary consideration. There are many state government programs designed tocreate new jobs, to retain and upgrade existing industries, to provide for the deploymentof new technologies for the purpose of enhancing workers’ performance andcompetitiveness, and to reverse trends of prolonged periods of area dilapidation andeconomic decay. Policymakers should ensure that any programs designed to accomplisheconomic revitalization can be applied to the communities identified in this report asparticularly vulnerable to a significant decline in the burley quota.

xiii

GLOSSARY

ADD Area Development DistrictARC Appalachian Regional CommissionBEA Bureau of Economic AnalysisCBO Congressional Budget OfficeCFA Community Farm AllianceDCL Domestic Content LegislationFDA Food and Drug AdministrationFSW Farm Sales WeightGATT General Agreement on Tariffs and TradeGF General FundOFM&EA Office of Financial Management and Economic AnalysisQ1 First QuartileQ2 Second QuartileQ3 Third QuartileREMI Regional Economic Models IncorporatedTRRF Tobacco Regions Reinvestment FundUSDA United States Department of Agriculture

xv

ACKNOWLEDGMENTS

The author gratefully acknowledges the careful and meticulous critiques of an earlierdraft of this report by faculty members from the University of Kentucky College of Agriculture.Also, if it were not for the time, interest and patience of the tobacco experts who provided thebulk of the data presented in this report, it would not have come to fruition. Ultimately,however, the author is responsible for any errors.

1

This report identifies and suggests the likely outcomes over the next 10 years of variousfactors that are likely to affect the future of burley tobacco. These trends include, but arenot limited to, increasing taxation on cigarettes at the state and federal levels, decreasingdomestic cigarette consumption, declining levels of domestic content in U.S. manufacturedcigarettes, and the increasing abundance of high quality (relatively cheap) burley in theworld market. These trends are important to Kentucky because they can affect future burleyquotas, which can have serious economic and social consequences for Kentucky’s tobaccogrowing communities. However, Kentucky’s policymakers can exercise varying degrees ofleverage over these factors. Accordingly, we offer recommendations to policymakers oncourses of action.

1.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

The Future of Burley Tobacco:Potential Outcomes,Points of Leverage,

and Policy Recommendations

2

This section explains the rationale of the study. Tobacco’s importance to theCommonwealth of Kentucky cannot be adequately understood by simply reciting thestatistics on the number of tobacco farmers or tobacco’s contribution to the state’s grossproduct. Although these numbers are, in themselves, quite impressive, they do not revealthe extent to which tobacco is interwoven into the basic fabric of the state’s history, cultureand ethos. Indeed, tobacco is much more than a $1 billion a year economic activity thatemploys nearly 100,000 Kentuckians.

Tobacco is, in fact, an essential element in the cycle of Kentucky life, and forms animportant thread of continuity with previous generations. While the technology surroundingthe tobacco industry has changed, the basic activity has remained fundamentally the samefor generations. In the same way that his great-great-grandfather spent his spring preparingplant beds and his winter stripping tobacco, today’s tobacco farmer is connected in anintimate and fundamental way to his ancestors as he engages in the same activities,frequently cultivating the same land, and sometimes even using the same tobacco barns.

Kentucky’s social, economic and cultural fabric, however, is beginning to show the strainfrom the increasing pressure placed on tobacco by several forces. As a way to help financenational health care reform, proposals have been made to substantially increase the federalexcise tax on cigarettes. This could, if enacted, significantly reduce cigarette consumption,and thereby accelerate its downward trend in the United States. Moreover, while cigaretteexports have experienced annual 15 percent increases for five of the last seven years, thistrend will assuredly slacken as international competitors continue to produce high qualityburley at low prices. Domestic content legislation, which took effect in January 1994, willhelp to stabilize tobacco quotas in the face of these pressures. At the same time, however,this leg-islation could result in a loss of jobs if value-added operations, like cigarette manu-facturing, are moved to foreign locations to escape the requirements of the legislation.

2.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Outline

• Rationale• Approach and purpose• Factors affecting burley’s future• Alternative scenarios• Economic and social implications• Policy recommendations

3

The rationale of this study is twofold. First, Kentucky is obviously a tobacco state. Second,the future of tobacco is clouded with uncertainty.

The value of tobacco production in 1992 was close to $1 billion, making it the state’sprimary cash crop. Moreover, it is grown in 119 of Kentucky’s 120 counties (Pike county isthe one county without a burley quota) and on two-thirds of Kentucky’s farms -- particularlyon Kentucky’s smaller farms.

The future of tobacco, however, is clouded with uncertainty. The burley quota promises tocontinue declining, the price support program is under fire in Congress, there is anabundance of high quality and relatively cheap burley available in the world market, there isa high likelihood that there will be an unprecedented increase in the federal excise tax oncigarettes, and cigarette consumption is likely to continue falling among Americans.

3.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Rationale

• Kentucky is obviously a “tobacco state”– value of production in 1992 was close to $1 billion and

tobacco is grown in 119 of Kentucky’s counties– Tobacco grown on roughly 60,000 of the state’s 90,000

farms (1987 census)» most are small farmers

• The future is clouded with uncertainty– KY’s basic burley quota continues to decline– price support program under fire– KY no longer sole supplier of high-quality burley– possibly facing a substantial increase in excise tax– declining numbers of smokers

4

Kentucky is obviously a major producer of tobacco. This chart illustrates the tobaccoproduction for the top five producing states. North Carolina and Kentucky are first andsecond, respectively, for all tobacco production. Kentucky, however, is the largest producerof burley in the United States. Indeed, approximately 95 percent of the tobacco grown inKentucky is burley.

Source: Kentucky Agricultural Statistics, 1992-1993, issued by the United StatesDepartment of Agriculture National Agricultural Statistics Service and the KentuckyDepartment of Agriculture, p. 6.

4.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

State Rankings for Tobacco Production in 1992

0

100

200

300

400

500

600

700

All Tobacco Burley Tobacco

Mill

ion

Pou

nds

NCKYTNSCVA

5

Tobacco is the primary cash commodity for Kentucky’s farms. This chart shows the topseven farm commodities with the remaining commodities aggregated in “Other.”


5.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Tobacco is the Primary Cash Commodity for KY Farms

$877

$692

$433

$285 $246 $221$146

$321

$0

$250

$500

$750

$1,000

Tob

acco

Cat

tle &

Cal

ves

Hor

ses

& M

ules

Dai

ry

Cor

n

Soy

bean

s

Hog

s

Oth

er

KY’s Cash Receipts

from Farm Marketings,

1992 (millions)

6

Most of the tobacco farms are small farms. This chart illustrates that approximately 80% ofthe farms with tobacco sales had total agricultural sales of less than $25,000.

Source: 1987 U.S. Census of Agriculture.

6.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

“Tobacco Farms” are Typically Smaller Farms

02468

10121416

$2.5or

less

$2.5-$4.9

$5-$10

$10-$25

$25-$50

$50-$99

$100-$249

$250-$499

Over$500

Agricultural Sales (thousands)

Far

ms

Sel

ling

Tob

acco

(t

hous

ands

)

7

This chart shows how Kentucky’s burley tobacco basic quota has fallen in recent years.Since 1991 Kentucky’s basic quota has fallen from 486 million pounds to an estimated 365million pounds -- a decline of around 25 percent.


7.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Kentucky’s Basic Burley Quota Continues to Decline

486450

405365

0

100

200

300

400

500

600

1991 1992 1993 1994

Bas

ic Q

uota

(m

illio

n lb

s.)

8

It is accurate to assert that many within the “tobacco community” are feeling significantapprehension about the future of tobacco. This is evidenced by the chart above. Thefollowing question was posed to numerous tobacco experts who are involved in all facets ofthe tobacco industry:

“Periodically bills are introduced in the U.S. Congress that are designed to eliminate thetobacco price support program. Using the scale below, how probable do you believe it isthat the tobacco price support program will be abolished within the next 10 years?”

Respondents were asked to check one of five options: Very Low, Low, Moderate, High, orVery High (refer to Appendix A, question 24, to see the survey instrument).

A frequency distribution of the response from the 24 respondents is provided in the chart.The most striking element in this chart is that over 50 percent feel that there is a moderate tovery high probability that the price support system will be abolished within the next 10years.

It is not our contention that the tobacco price support system is likely to be abolished.Indeed, many have indicated that there will always be the option of using private funding tooperate this system. Rather, we are simply trying to illustrate the degree of uncertainty andapprehension felt by many within the tobacco community regarding an important element oftobacco’s future.

Note: These experts constitute a diverse group: 7 experts were farm organization leaders, 6were U.S. Department of Agriculture experts in the production and marketing of tobacco, 5were university faculty with specialized knowledge of tobacco, 2 were economists workingfor (Kentucky) state government, 2 were agriculture specialists within (Kentucky) stategovernment, 2 were with a tobacco advocacy and research organization, 1 was a privateagriculture consultant, 1 was a tobacco warehouseman, and 1 was anonymous.

8.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

The Probability of Tobacco Price Support System BeingAbolished Within 10 Years

17%

25%

33%

4%

21%

0%

5%

10%

15%

20%

25%

30%

35%

Very Low Low Moderate High Very High

n = 24

9

This chart also demonstrates the apprehension and uncertainty felt by tobacco expertsregarding the future of tobacco. The following question was asked of the same tobaccoexperts:

“Kentucky enjoys the distinction of growing the highest quality burley in the world.However, foreign producers have increased the quality of their burley tobacco in recentyears. Using the scale below, how probable do you believe it is that burley producedoutside the U.S. will be of equivalent quality to Kentucky burley within the next 10 years?”

Respondents were asked to check one of five options: Very Low, Low, Moderate, High, orVery High (refer to Appendix A, question 25).

A frequency distribution of the response from the 24 respondents is provided in the chart.Again, the most striking element in this chart is that nearly 50 percent feel that there is amoderate to high probability that foreign burley will match Kentucky quality within the next10 years.

Parenthetically, it should be mentioned that there are really two issues associated with“quality.” The first is that the foreign producers are gaining ground, and the second is thatquality doesn’t matter as much now because of the increasing sophistication of blendingtechniques. The increasing quality of foreign burley and sophistication of blendingtechniques have narrowed the taste difference between Kentucky burley and foreign burley.At the same time, cigarettes produced with foreign burley (i.e., the “generics”) aresignificantly cheaper. Smokers in the U.S. have demonstrated a willingness to sacrifice alittle quality for a significant price difference.

9.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

The Probability of Foreign Burley Matching KentuckyQuality Within 10 Years

13%

42%

17%

29%

0%0%5%

10%15%20%25%30%35%40%45%

Very Low Low Moderate High Very High

n = 24

10

There is less uncertainty and more apprehension reflected in this chart. The followingquestion was posed to the tobacco experts:

“Do you think there will be an increase in the federal excise tax on a pack of cigarettes?”(refer to Appendix A, question 1).

The pie chart above reflects their collective response. There is near unanimity that thefederal excise tax on a pack of cigarettes will be increased. In many respects this is not asurprising result when one considers the broad base of support among the American publicfor a tax increase to help finance national health reform. For example, a Time/CNN pollconducted in April 1994 found that 58 percent of non-smokers felt that the tax should beincreased to $1.25 (it is $0.24 now). When smokers’ preferences were included, thepercentage who felt that the tax should be increased to $1.25 was still over 50 percent -- anamount substantially higher than the $0.75 increase proposed by President Clinton.1

The real question, then, is not, “Will there be a tax?,” but, “How large will it be?”

10.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Will the Federal Excise Tax on Cigarettes be Increased?

Yes96%

No4%

n = 24

11

This chart places the question of “How large will it be?” into a wider historical context. Thebars from 1950 to 1993 reflect actual data on the federal excise tax for a pack of cigarettes(in constant 1989 dollars). The bar for 1994 reflects three different tax levels -- a $0.25increase over the current $0.24 excise tax for a total tax of $0.49, a $0.50 increase to $0.74,and a $0.75 increase to $0.99. These three hypothetical increases -- $0.25, $0.50, and $0.75-- reflect the most likely outcomes according to a group of tobacco experts regarding thecurrent debate on whether to increase the tax.

Source: Federal Taxation of Tobacco, Alcoholic Beverages, and Motor Fuels,Congressional Budget Office, August 1990, p. 107.

11.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Proposed Federal Excise Taxesin the Historical Context

$0.00$0.10$0.20$0.30$0.40$0.50$0.60$0.70$0.80$0.90$1.00

50 54 58 62 66 70 74 78 82 86 90 94Year

1989

Dol

lars

$.49

$.74

$.99 (current dollars)

12

These data illustrate how the number of Americans who smoke is on a downward slope.This, obviously, does not bode well for the tobacco industry. (These data reflect the numberof Americans who have indicated they have smoked in the past year -- as opposed to thepast month.)

Source: National Institute on Drug Abuse, National Household Survey, various years.

12.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Americans Who Smoke:What Does the Future Hold?

0%

10%

20%

30%

40%

50%

1979 1982 1985 1988 1991

Per

cent

of R

efer

ence

Pop

ulat

ion

Youth Age 12-17Young Adults Age 18-25Adults Age 26 and Older

13

The study’s approach and purpose are described in this section.

13.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Outline


14

The purpose of this research project is fivefold: (1) identify the factors that are affectingtobacco’s future; (2) ascertain their likely outcome over the next 10 years; (3) delineate theirpotential consequences on future burley quotas; (4) understand the economic implications ofa changing burley quota; and (5) develop recommendations for policymakers that facilitate abest case scenario and hedge against a worst case scenario.

14.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Approach and Purpose

• Identify the factors affecting tobacco’s future• Ascertain their likely outcome over the next

decade• Delineate their potential consequences on

future burley quotas• Understand the economic implications of a

changing burley quota• Develop recommendations for policymakers

– how can policymakers facilitate a best-case scenario andhedge against a worst-case scenario?

15

The principal method used in this study for determining the likely outcomes of the factorsaffecting tobacco over the next 10 years is a delphi approach. The delphi approach forsoliciting expert opinion is commonly used when traditional methods of deriving parametervalues may not be appropriate. For example, there is a rich body of empirically derivedresearch on the relationship between cigarette price increases and the resulting reduction incigarette demand. However, these demand elasticities are derived from data that areprobably not generalizable to the anticipated tax increase. Consequently, one would beguilty of extrapolating beyond the range by using these demand elasticities. Moreover, the“structure” of the tobacco system appears to be changing. In short, there is an abundance offoreign grown high-quality burley available on the world market that is relatively cheap.Also, anti-smoking regulations in the United States are achieving new heights. Aquantitative modelling of the factors affecting the future of burley tobacco would entailmodelling data of a different “era” and would therefore not reflect these apparent systemicchanges. In contrast, the delphi approach allows one to circumvent the methodologicalproblem of systemic change and extrapolating beyond the range by engaging experts andobtaining their perspective on these factors. Accordingly, an expert questionnaire was used,along with an extensive literature search, to determine expert opinion on the likely course ofthe many factors affecting the future of burley tobacco (see Appendix A).

These experts represent several different perspectives, including the universities, industry,growers, USDA, policymakers, and other interested groups/individuals (refer to page 8 for acomplete description of the experts).

Their answers produce a range of possible values for the factors affecting the future ofburley tobacco. For example, twenty-four experts responded to the question, “How muchdo you think this (tax) increase will be?” Their answers ranged from $0.00 to $1.00. Thefirst, second, and third quartile values are $0.25, $0.50, and $0.75 (see

15.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Factors Affecting Burley:Outcomes & Impact

• Questionnaire and literature search used toidentify expert opinion on what might happenover the next 10 years

– university, industry, growers, USDA, health officials,policymakers, other interested groups/individuals

• Answers produce a range of possible valuesfor the factors affecting the future of tobacco

– for example, excise tax increase -- $0.00 to $1.00

• Results used in a quantitative model of theburley system

– used to identify possible outcomes for future burleyquota

16

page 73, “Proposed Tax Increase: How Much is Expected?”). Distributions were created forall of the factors and the resulting quartile values were used in a quantitative model of the“burley” system to determine the most probable impact on future burley quotas. Using theexample of the anticipated tax increase, the median or second quartile value of $0.50 wasused to represent the “most probable” outcome. The first quartile value of $0.25 representsthe “best probable” and the third quartile value of $0.75 reflects the “worst probable.”

17

In order to offer policy recommendations, it is necessary to identify those factors that havethe greatest impact on the system and offer the greatest leverage.

This quantitative model of the burley system allows us to conduct a sensitivity analysis toidentify those factors having the largest impact on the system. For example, will the likelyannual rate of change in the number of Americans who smoke or the likely annual rate ofchange in cigarette exports have a bigger impact on future burley quotas?2 Sensitivityanalysis helps us answer these questions.

The questionnaire is used to obtain expert opinion on which factors offer the greatestleverage. Leverage is defined as the opportunity for policymakers to alter the course of thefactor. For example, according to the experts, Kentucky’s policymakers would have moreluck altering the course of domestic leaf content in cigarettes than they would affectingforeign cigarette consumption.

17.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Developing PolicyRecommendations

• Focus on the factors with the greatest impacton future quotas and offer the most leverage

• Sensitivity analysis identifies factors withimpact

• Questionnaire used to identify points ofleverage

18

Some of the factors affecting the future of burley tobacco are delineated and discussed inthis section.

18.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Outline


19

This chart lists some of the factors affecting the future of burley tobacco. There is, ofcourse, the likelihood of a significant increase in the federal excise tax on a pack ofcigarettes. This is important because it promises to have the impact of reducing cigaretteconsumption, and, in turn, the amount of burley needed for making cigarettes. Even withouta significant increase in the excise tax, however, cigarette consumption is anticipated to fallin the United States both at the aggregate and per smoker level. Foreign cigaretteconsumption has helped replace the declining numbers of cigarettes consumed in the U.S.,but the annual rate of change in foreign cigarette consumption (or cigarette exports) isexpected to slacken. The level of domestic content in cigarettes is another important factor.An important element to domestic content is the status of domestic content legislation,whose longevity is somewhat uncertain. If domestic content legislation, or some alteredform of it, remains in effect for the next several years, as some expect, it will have importantconsequences for the level of leaf exports and the numbers of cigarette produced in the U.S.-- both of which exercise an important influence on burley quotas. There are many otherfactors that could have an important influence on future burley quotas, including the level ofburley leaf in cigarettes, the amount of tobacco used in cigarettes, the abundance of foreigngrown (relatively cheap) high-quality burley, and whether any of the extended uses for thetobacco plant will have a significant impact on future quotas.

19.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Some Factors Affecting theFuture of Kentucky Burley

• Possible cigarette tax increase• Domestic cigarette consumption

– aggregate & per smoker

• Foreign cigarette consumption• Domestic content• Exported leaf• Burley leaf in cigarettes• Abundance of high quality (relatively cheap)

burley in the world market• Extended uses for tobacco

20

Some alternative scenarios for future burley quotas are discussed in this section.

20.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Outline


21

As previously described, frequency distributions for each of the factors affecting the futureof burley tobacco are generated from the expert responses to the questionnaire. Thequartiles are identified and the tails of the distributions are truncated in order to dampen theinfluence of egregious outliers. Then, these values are plugged into the model to producethe alternative scenarios: “Q1 - First Quartile,” “Q2 - Second Quartile,” and “Q3 - ThirdQuartile.”

The alternative scenarios generated in this analysis focus principally on future quotas andimplicitly assume that price support levels will remain relatively static. This is becausegrowers have typically shown a preference to maintain price at higher levels and acceptlower quotas when faced with pressure to accept either lower price support levels or lowerquotas. This has not, however, always been the case, and the experience of the mid-1980sillustrates how growers have been willing to accept lower price supports in one instance.Indeed, many in the tobacco industry have suggested that the same could happen during themid-1990s.

As a result, these alternative scenarios should be viewed as what could happen to futurequotas given present circumstances. These scenarios should not be viewed as the definitiveand inclusive range of all possible outcomes. Obviously, if the Chinese market suddenlyopened in a significant way to non-Chinese cigarettes (currently the Chinese market islargely closed to U.S. cigarette imports) then quotas in ten years could be at least as high asthey are today -- or even higher.3 At the same time, if the Food and Drug Administration(FDA) takes action to significantly regulate cigarettes, then quotas could be substantiallylower in ten years than those estimated in this analysis.4 Likewise, other events could occur,like major changes in the tobacco program or price support level, that could significantlyalter the course of events. Presumably though, the probability of some of these eventsoccurring should be implicitly captured by the delphi approach. For example, an expert’sforecast of

21.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Producing AlternativeScenarios

• Generate distributions for all factors• Identify the values at the quartiles

– 25th, 50th, & 75th percentiles– truncating the distribution mitigates the impact of

egregious outliers

• Plug these values into the model• Resulting output will produce alternative

scenarios– “Q1,” “Q2,” and “Q3”

22

future cigarette exports would certainly reflect the anticipation of changes in the status ofthe Chinese market access to U.S. produced cigarettes.

23

The model assumptions with regard to parameter values are shown on this slide. Factorsaffecting the future of tobacco are listed on the left. The first, second, and third quartilevalues that were derived from the distributions produced by the expert questionnaire arelisted across the rows, beginning with the “Q1,” “Q2,” and “Q3.”

For example, according to the tobacco experts, the first quartile value for the proposedincrease in the federal excise tax is $0.25. Meanwhile, the median or second quartile valueis $0.50 and the third quartile is $0.75. The anticipated values associated with the expecteddecrease in consumption are -5%, -11% and -15%. Cigarette consumption is expected todecline at both an aggregate and per smoker level as evidenced by the range of values of -2% to -4% and -2.1% to -4.8% respectively. On the other hand, it is generally believed thatcigarette exports will increase over the next ten years as demonstrated by the range ofexpected annual increases of 3% in the best probable scenario to 1% in the worst probablescenario. Currently, the amount of burley leaf in cigarettes is about .75 pounds (in FarmSales Weight, FSW, per 1,000), and is generally expected to remain stable. However, somebelieve it will be lower and this is reflected in the .67 lbs. per 1,000 cigarettes in the worstprobable case. The size of cigarettes has fallen steadily since the 1950s but further declinesare not expected by the tobacco experts surveyed. Finally, while researchers are hopefulthat extended uses for the tobacco plant (e.g., protein source or molecular geneticengineering) will increase the demand for tobacco, none of the tobacco experts expects thatthese uses offer the potential to significantly increase the burley quota within the nextdecade.

23.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Model Assumptions Used inCreating Alternative Scenarios

• Excise tax $.25 $.50 $.75• Cons. impact (annual) -5% -11% -15%• U.S. smokers (agg.) -2% -3% -4%• U.S. smokers (per) -2.1% -3% -4.8%• Cigarette exports 3% 1.5% 1%• Burley leaf .75 .75 .67• Cig. size 0% 0% 0%• Extended uses 0 0 0

Q1Q1 Q2Q2 Q3Q3

24

The model assumptions are continued on this chart. The vast majority (87%) of the tobaccoexperts indicated that domestic content legislation (DCL) would not survive the GATTreview (refer to page 81). The real question centers on how long it will remain. Theassumptions used in this analysis are 5 years, 3 years, and 1 year.

A majority of tobacco experts believe domestic content legislation will have a negativeimpact on leaf exports. This is because the world market will likely have an abundance oftobacco leaf due to cigarette manufacturers not buying as much on the international marketas they would have without the domestic content legislation. Thus, to ensure that thescenarios are internally consistent and make substantive sense, it is assumed that leafexports will decline by 1.5% annually in the “Q1” scenario while they will increase by 2%annually in the “Q3” scenario.

Similarly, most experts believe that cigarette manufacturers will “move” some production“off-shore” to escape the requirements of the legislation. This is because foreign leaf istypically cheaper than U.S. grown leaf. The real questions then become, “how muchproduction will move off-shore?,” and “how much U.S. grown leaf will be used in thesecigarettes?” The assumptions used in the scenarios are shown above, with 175 billion unitsmoved off-shore in “Q1,” 100 billion in “Q2,” and 0 in “Q3.” Again, this ordering reflectsthe necessity of internal consistence and substantive sense -- with manufacturers movingmore units off-shore the longer domestic content legislation remains in effect.

Finally, the domestic content of cigarettes manufactured in the U.S. was about 60% beforethe DCL was instituted. The tobacco experts were asked to estimate where this percentagemight be in ten years without domestic content legislation. Their response is reflected in thelast line, with 53% in “Q1,” 50% in “Q2,” and probable,” and 40% in “Q3.” Refer toAppendix D, “Model Assumptions and Questionnaire Results in Their Historical Context,”to view the distributions that produced these values.

24.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Model Assumptions, cont.

• DCL 5 yrs 3 yrs 1 yr

• Leaf exports* -1.5 -1% 2%

• Cigs moved ‘off-shore’ * 175 100 0• ‘Off-shore’ (dom cont) 29% 25% 16%• Long-term dom. cont. 53% 50% 40%

Q1Q1 Q2Q2 Q3Q3

*Scenarios should be internally consistent.

25

The impact that each factor exercises on Kentucky’s burley quota is largely dependent onwhere Kentucky’s burley is going. For example, if most of Kentucky’s burley was exportedas unmanufactured leaf instead of being used for cigarette production for U.S. consumption,then the impact of the tax increase would be significantly different.

This chart shows the approximate distribution of Kentucky’s burley. The exact distributionused in the model is 48% in domestic cigarettes, 19% in exported cigarettes, 29% inexported leaf, and 4% in other (see slide 73, “Distribution of Kentucky Burley: ModelAssumptions).

25.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Impact of Factors Depends on WhereKentucky Burley Goes

50%

20%

30%

Cigarettes(domestic)

Cigarettes(exported)

LeafExports

KentuckyBurley

26

The three bars illustrate the resulting impact on Kentucky’s burley basic quota if the tobaccoexperts’ projections come to fruition. The line above the bar indicates the 1993 basic quotaof 406 million pounds.

The “Q1” and “Q3” scenario outcomes are so similar because of the assumptions regardingthe movement of cigarette manufacturing “off-shore” and the negative impact on leafexports resulting from domestic content legislation. The 175 billion cigarettes expected tobe “moved” to foreign locations (see page 24) in the “Q1” scenario and the significantly lessU.S. grown leaf used to manufacture them has a tremendous negative impact on futureburley quotas. In contrast, no cigarette production was moved or shifted to foreign locationsin the “Q3” scenario.

As one can see, there is a remarkable convergence around the 240 million pound level, butwhat does this reflect on a percentage basis?

26.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Kentucky’s Estimated Burley Basic Quota in the Year 2003

250 239 237

406 406 406

050

100150200250300350400450

Q1 Q2 Q3

Mill

ion

lbs.

27

The percentage change from 1993 to 2003 are reflected on this slide. As one can see, thesebasic quota levels converge at around a 40% decline in Kentucky’s basic burley quota. Itshould be noted that Kentucky’s basic burley quota could drop by up to 30% within the nextfew years -- but it could then rise once the pool levels are brought down. The purpose ofthis analysis is to anticipate the long-term structural factors affecting future burley quotas --not the short-term oscillations.

27.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Estimated Percentage Change in the Quota From 1993 to 2003

-39%-41% -42%-45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%Q1 Q2 Q3

Per

cent

age

Cha

nge

in K

Y’s

Quo

ta,

’93

to ’0

3

28

The proposed federal excise tax increase on a pack of cigarettes has received the bulk ofmedia attention with regard to the future of burley tobacco. However, this analysis showsthat even without a tax increase future burley quotas are likely to experience a significantdecline.

The assumptions in the “Q1,” “Q2,” and “Q3” scenarios are that there will be 5%, 11%, and15% declines in cigarette consumption resulting from a proposed tax increase (thesenumbers reflect the quartile values derived from the tobacco experts’ responses). Moreover,the assumption used in the model is that this percentage change will occur in each of thenext 10 years -- not just in the first year. This assumption is consistent with recentlypublished empirical literature on the long-term impact of price increases.5

Typically the focus is on the first-year impact on consumption. Some feel that after the firstyear of a price increase the consumer will adjust to it or that incomes will rise andconsumption will return to where it would have been without a price increase. Others feelthat the magnitude of tax increase being discussed will disproportionately affect youngsmokers (who have less disposable income and represent the biggest pool of new smokers)and permanently depress the number of smokers. Moreover, some have even suggested thatthe negative impact could be even greater in the future years. In this case it is assumed thatthe lost revenue resulting from less consumption will give rise to even higher taxes, which,in turn, will likely result in less consumption (and ultimately less revenue).

As a result, it was decided to strike a middle ground and assume that any reduction inconsumption associated with a tax increase would be felt with the same magnitude for eachof the years from 1993 to 2003.

28.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

How Much Difference Does A Potential Tax Increase Make?

-39%-41% -42%

-36% -36% -37%

-50%

-40%

-30%

-20%

-10%

0%Q1 Q2 Q3

Per

cent

age

Cha

nge

in K

Y’s

Q

uota

, ’93

-’03

Tax Increase No Tax Increase

29

Some illustrative economic and social implications resulting from a 41% decline inKentucky’s burley quota are discussed in this section.

29.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Outline


30

In order to address the issue of the economic and social implications resulting from a 41%decline in Kentucky’s burley quota, it is necessary to understand tobacco’s economicimportance to Kentucky.

The Office of Financial Management and Economic Analysis conducted an analysis using1992 data to determine the impact at the farm level. This analysis did not include anexamination of the impact of tobacco manufacturing (i.e., cigarette manufacturing).

It was found that tobacco was responsible for $518 million in state personal income, whichwas almost 1 percent of the state’s total personal income. Also, tobacco accounts for 78,000full- and part-time jobs, which is around 5 percent of the total number of jobs in Kentucky.

A study done by Price Waterhouse in 1992 for the Tobacco Institute found that 137,000 jobsrelated to tobacco in 1990 (both on and off the farm) accounted for $2.1 billion in wagesand benefits in Kentucky.

30.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Tobacco’s EconomicImportance to Kentucky

• Responsible for $518 million in state personalincome in 1992

– 0.9 percent of the total

• Accounts for 78,000 full- and part-time jobs– 5 percent of the total

• Relatively small amount of income at risk– but a disproportionate impact on low-wage jobs

Source: Office of Financial Management and Economic Analysis, Finance and Administration Cabinet

31

This chart places a 41% decline in Kentucky’s basic burley quota into the context of thestate’s total employment. It juxtaposes Kentucky’s total employment (1990) to theassociated job losses if a $300 million decline in value of Kentucky tobacco crop occurs.6

The $300 million drop is derived by taking the dollar value of tobacco at 406 millionpounds ($1.80 per pound) and at 240 million pounds ($1.80 per pound).7 Given theseassumptions, the value of the tobacco crop would be $731 million (or $0.731 billion) in thefirst example and $432 in the second instance.

Kentucky’s total employment in 1990 was about 1.6 million (or 1,600 thousand). Using theregional input-output multipliers for Kentucky that the Bureau of Economic Analysis (BEA)has developed, a $300 million drop in tobacco output would translate into a loss of 24,300jobs. Alternatively, the REMI model estimates the employment effects associated with a$300 million decline at about 10,000 jobs lost (see Appendix F, “REMI Analysis ofReduction in Tobacco Quota”).

In both cases, it is apparent that this is a relatively small number in the wider context of thestate’s total employment. This would seem to bear out the contention made by USDAanalysts. This analysis was centered on the economic impact associated with a 30 percentdecline in tobacco production. They found that, in general, “as a share of total economicactivity, the impacts are relatively small.”8 (However, they also noted that a 30 percentdecline in tobacco production would be quite painful in localized areas -- especially inseveral Kentucky counties.)

31.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

A 41% Decline in the Burley Quota in the Contextof the State’s Total Employment

1,615

-10-24-250

0

250

500

750

1,000

1,250

1,500

1,750

KY Employment’90

BEA REMI

Jobs

(th

ousa

nds)

32

The value of a farm in Kentucky is obviously dependent upon the perceived value of theland. Given that tobacco quotas are tied to a farm it is likely that the value of a farm willdecline as the value of tobacco quotas decline. However, land values can be influenced intwo offsetting ways. If less quota is available, then the land is probably worth less in theeyes of a potential purchaser. On the other hand, if the supply of quota is reduced, then anyremaining quota becomes more valuable -- thereby increasing the value of land with quota.Nevertheless, most seem to believe that land values will be driven down as the value oftobacco (i.e., less quota) declines.

Source: William M. Snell and Steven G. Isaacs, Examining the Economic Impact of HigherExcise Taxes on the U.S./Kentucky Burley Tobacco Industry, University of Kentucky,College of Agriculture, February 1994.

32.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

The Impact of a DecliningQuota on Land Values

• Land values can be influenced in twooffsetting ways (Snell & Isaacs, 1994)

– less quota per acre reduces the value of land to apotential purchaser

– if the supply of quota is reduced, then remaining quotabecomes more valuable - thereby increasing the value ofland with quota

• The uncertainty surrounding the future ofburley will probably depress land values

33

We have thus far focused our attention on the impact of a declining burley quota at the statelevel. This comparison has suggested that at a state level the economic impact of a 41%decline in the tobacco quota would be relatively small as a share of the state’s totalemployment and income.

To be certain, however, certain communities would be particularly hard hit by a decliningquota. This slide explains the method for identifying the counties that would be especiallyhard hit by a significantly lower burley quota. There are two relevant questions. First,which counties are the most “tobacco dependent?,” and second, “which counties are alreadyin ‘distress’?”

“Tobacco dependence” is defined as the county’s tobacco income as a percentage of thecounty’s total income. If this percentage is over 5%, then it is defined as high.9 If thispercentage is from 0% to 2.5% then the county’s tobacco dependence is assumed to be low.Finally, a value between 2.5% and 5% places the county in the medium category. We arenot including indirect effects in this definition, but it does not matter for the purposes of thiscomparison. This is because our focus is the relative dependence, not the absolutedependence.

Similarly, an attempt was made to identify those counties already in distress. The countypoverty rate was used as a proxy to determine whether a county is in “distress.” Thepoverty rate for the entire state is about 22%. Over 25% would place a county in the highcategory, between 15% and 25% in the medium group, and less than 15% in the lowcategory.

33.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

What About the Impact at theCounty Level?

• Which counties are the most “tobaccodependent”?

– tobacco income as a percentage of total county income» 0 to 2.5% = low» 2.5% to 5% = med» over 5% = high

• Which counties are already in “distress”?– county poverty rate

» 0 to 15% = low» 15% to 25% = med» over 25% = high

34

These two dimensions are combined into a single matrix to identify those counties that havethe highest tobacco dependence and highest poverty rate. This matrix reveals 15 countiesthat rank “high” on both dimensions. There are yet another 38 counties that rank at least“medium” on both dimensions. This would indicate that a total of 53 counties are at leastmedium on both dimensions. (Refer to Appendix C for a listing of each county’s povertyrate and tobacco’s portion of county income.)

34.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Tobacco Dependence by Poverty Rate (counties)

POVERTYRATE

TOBACCO DEPENDENCE

low

low

med

med

high

high

13

27

9

12 17

24

21 15

61 25 34

56

19

45

35

This chart lists the fifteen counties that are at greatest risk from a significant decline in theburley quota. These 15 counties are located in eight different Area Development Districts(ADD) (Buffalo Trace, FIVCO, Gateway, KY River, Cumberland Valley, Bluegrass, LakeCumberland, and Barren River). In order to place these percentages into a wider context, itis important to note that at the state level (analyzing all 120 counties), the median value fortobacco dependence is 2.2% and the median value for the poverty rate is 21.1%.

35.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Fifteen Counties at Risk from aSignificant Quota Decline

CountyTobacco’s Estimated Portion

of Total Personal Income (percent)Poverty Rate

(percent)State (median) 2.2 21.1Bath 9.9 27.3Casey 7 29.4Clinton 4.9 38.1Cumberland 6.5 31.6Elliott 7.1 38Fleming 9.2 25.4Hart 9.3 27.1Jackson 5.3 38.2Lewis 5.9 30.7Lincoln 5.5 27.2Menifee 6.1 35Metcalfe 10 27.9Morgan 6.1 38.8Owsley 7.5 52.1Wolfe 6.1 44.3

36

This map illustrates the fifteen “at risk” counties. These counties are located in quitediverse areas of the state. Consequently, there is no magic bullet in terms of a solution forthe lost tobacco income that these counties are likely to face. They have distinct strengthsand weaknesses. For example, Hart County is already agriculturally diverse with significantproduction in alfalfa hay, corn, wheat and soybeans. Elliott County, on the other hand, hasdifferent opportunities and constraints available to it.

The differing strengths and weaknesses of these counties necessitate unique solutions, andthis suggests that the local citizenry must play an active role in determining the future courseof these communities.

36.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Fifteen Counties at Risk from aSignificant Quota Decline

insert map here.

37

Policy recommendations are offered in this section. It is important to note that theserecommendations are designed to simultaneously achieve two objectives:

(1) facilitate a best case scenario by attempting to keep the burley quota as high as possible;and

(2) hedge against a worst case scenario by taking actions to cushion the impact of adeclining quota for those most affected.

37.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Outline


38

What then, can policymakers do to facilitate a best case scenario?

Before answering this question, it is necessary to:

(1) identify those factors exercising the greatest impact on burley quotas;

(2) identify those factors that offer the most leverage to policymakers to affect;

(3) isolate those factors that have the greatest impact and offer the most leverage topolicymakers; and

(4) formulate policies that address these important elements.

38.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Facilitating a Best Case:What Can policymakers Do?

• First -- identify factors with greatest impact• Second -- identify factors with most leverage• Third -- isolate those factors that have the

greatest impact and offer the most leverage• Fourth -- formulate policies that address

those important elements

39

Sensitivity analysis is used to identify those factors having the greatest impact on the burleyquota. This is done by setting the quantitative model (see Appendix E) to its base linevalues, and then changing each parameter -- one at a time -- to the median value derivedfrom the expert responses, gauging the impact on the burley quota.

For example, no changes are expected in cigarette size, extended uses for tobacco, or theamount of burley leaf used per 1,000 cigarettes. As expected then, the sensitivity analysiswould register no impact on the burley quota. These three factors are appropriately listed atthe bottom of the ranking on the chart and are considered to be in the “low” impactcategory.

The expert consensus regarding the annual rate of change over the next ten years forunmanufactured leaf exports is -1% (the median value). If all other factors are held constantat their base line value, then the burley quota would decrease by -2.8% -- as reflected in thechart above. Rounding out the remaining four factors in the “medium” grouping are theexpected annual rate of change in foreign cigarette consumption (1.5% annual changeresulting in a 3.1% increase in the quota), a tax increase of $0.50 (resulting in a 11% declinein domestic cigarette consumption and a commensurate 7.9% decline of the burley quota),domestic content in cigarettes that moves incrementally downward to 50% (with a -8.6%impact on the quota), and the movement of 100 billion cigarettes “off-shore” (-9.1% quotadecline).

There are two factors in the “high” impact category. They are the anticipated annual declineof 3% in both aggregate and per smoker cigarette consumption. Both of these factors resultin a 12.6% decrease in the burley quota.

The sensitivity analysis suggests that policymakers attempting to keep the quota as high aspossible ought to focus their attention on those factors at the top of the chart. However, thisis not the complete story because not all factors offer the same

39.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Sensitivity Analysis Helps Identify Factors with Impact

-15.0% -10.0% -5.0% 0.0% 5.0%

Domestic Cig. Cons.

Per Smoker Cons.

Movement "Off-Shore"

Dom. Content

Tax Increase

Foreign Cons.

Exported Leaf

Leaf Used

Extended Uses

Cig. Size

Percentage Change in Quota, ’93 to ’03

40

degree of leverage to policymakers. Therefore, it is important to also consider where thegreatest leverage is to be found.

41

The questionnaire was used to ascertain where the leverage exists for policymakers to affectthe factors exercising influence over the future burley quotas. The tobacco experts wereasked to gauge on a scale that ranged from 0 to 5 the amount of leverage available forpolicymakers (where 0 indicates no leverage and 5 indicates very high leverage).

The specific question reads: “Several potentially important elements of change that couldaffect the future of burley tobacco are listed below. How much influence or leverage do youthink Kentucky’s federal and state level policymakers can exercise on these factors? Usethe scale below to indicate the degree to which you believe policymakers can affect thecourse of these factors” (see Appendix A, question 26.).

There are five factors that are arguably in the “low” leverage category. The experts gaveforeign cigarette consumption the lowest average score at 1.1, while both aggregate and persmoker domestic cigarette consumption had average scores of 1.5 and 1.6 respectively.Similarly, the expert consensus is that there is little leverage to be had over cigarette size,demonstrated by an average of 1.6, or leaf distribution, which has an average leverage scoreof 1.9.

There are three factors in the “medium” leverage range, with the movement of cigaretteproduction “off-shore” showing an average score of 2.3, developing extended uses fortobacco at 2.6, and facilitating leaf exports at 2.7.

Finally, there are two factors in the “high” leverage category. The two factors believed tooffer the most leverage to policymakers are the proposed tax increase at 3.2 and the level ofdomestic content at 3.3.

(Refer to Appendix B, questions 26a. to 26l., for the summary statistics derived from theexpert consensus on each factor).

41.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Experts Identify Factors Offering Leverage

0 0.5 1 1.5 2 2.5 3 3.5

Domestic Content

Tax Increase

Exported leaf

Extended uses

Movement "Off-Shore"

Leaf distribution in cigs.

Cigarette size

Per smoker consumption

Domestic cig. consumption

Foreign cig. consumption

Average Leverage "Score"

42

The two dimensions of leverage and impact are combined to produce the matrix illustratedon this slide. It shows, for example, that there are no factors that offer both “high” impactand leverage, although there are several factors that demonstrate at least “medium” impactand leverage.

42.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Isolate Factors With Impact and Leverage

LEVERAGE

IMPACT

low

low

med

med

high

high

- cig. size- leaf dist.

- extended use

- tax increase- domestic

content

- leaf exports

- movement“off-shore”

- domesticconsumption- per smoker

- foreign cons.

43

Clearly then, the formulation of policies designed to keep the burley quota as high aspossible ought to be focused on those factors offering the most leverage and impact. This isnot to suggest that policymakers ignore other factors that can also make a difference. Forexample, the expert consensus is that policymakers can exercise a relatively high degree ofleverage over the extended uses for tobacco. At the same time, however, virtually none ofthe experts surveyed felt that this factor would have a significant impact on the burley quotaover the next 10 years.

Consequently, we focus our attention on those factors that can make a difference on futurequotas and over which policymakers can exercise some control. The four factors identifiedby this analysis as deserving the most attention by policymakers are:

• the movement of cigarette manufacturing “off-shore”;

• the export of unmanufactured leaf;

• the tax increase; and,

• domestic content.

43.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Formulate Policies That Target These Factors

LEVERAGE

IMPACT

low

low

med

med

high

high

- cig. size- leaf dist.

- extended use

- tax increase- domestic

content

- leaf exports

- movement“off-shore”

- domesticconsumption- per smoker

- foreign cons.

44

• Work to enact legislation to have domestic content labelled on a package of cigarettes.Approximately 50 percent of Kentucky's burley is used in the production of cigarettes thatare consumed in the United States. It is no surprise, then, that the level of domestic contentin cigarettes exercises substantial influence over Kentucky's burley quota. However, thedomestic content legislation that took effect in January 1994, which is designed to increasethe level of U.S. grown tobacco leaf in cigarettes, will likely be ruled inconsistent with thefree trade provisions of the General Agreement on Tariffs and Trade (GATT). Pressure willthen mount on the United States to abolish this legislation. While some elements of thislegislation might legally remain intact under Article 28 of GATT, many believe that thislegislation is accelerating the movement of cigarette production "off-shore." Oneconsequence of a "shift" from the United States to foreign locations is the likelihood thatsignificantly less domestically grown tobacco will be used in cigarette production. Thesame desired end (i.e., increasing domestic content) can be achieved through market forcesif burley groups can capitalize on their comparative advantage of higher quality leaf, but thiscan only be done if domestic content is labelled on a pack of cigarettes.

44.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

• Work to enact legislation to have domesticcontent labelled on the package

– GATT review committee will likely pressure U.S. toeliminate domestic content legislation

» most believe it is accelerating the movement “off-shore”

• “off-shore” production uses less U.S. tobacco

» DCL makes it difficult to compete internationally, andthis is where the growing markets are located

• retaliation could ensue• will likely depress leaf exports

Policy RecommendationsDesigned to Facilitate a

Best Case Scenario

45

• Create a consortium of tobacco producing states to market leaf exports. About 30 percentof Kentucky's burley is exported as unmanufactured leaf. As a result, the level of leafexports exerts a major influence over Kentucky's burley quota. Until a few years ago, thefederal government provided this service under the Market Promotion Program. Thetobacco producing states should fund market promotion programs to achieve this purpose.Also, Kentucky should consider a Farm Bureau recommendation to provide funding for aneconomist "to study and determine potential foreign market areas for Kentucky growntobacco" (Kentucky Farm Bureau Policies, 1994).

• Fund research and development that is focused on extended uses for the tobacco plant.The tobacco plant holds tremendous potential as a source of high grade protein and as a toolfor molecular biologists in bioengineering. While few believe that these extended uses willmature sufficiently over the next decade to significantly help tobacco farmers (see AppendixG), there appears to be enough promise in these areas to warrant future research anddevelopment. Policymakers should encourage this type of research at the state's universitiesby ensuring that funding is channelled in the necessary directions.

45.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Policy Recommendations, cont.

• Leaf exports– federal gov’t no longer pushing tobacco exports as part

of the Market Promotion Program– KY should facilitate the creation of a consortium with

other tobacco producing states to do their own marketing» fund market promotion programs» employ an economist “to study and determine

potential foreign market areas for Kentucky growntobacco” Kentucky Farm Bureau Policies, 1994.

• Research & development funding onextended uses

46

At the same time policymakers are trying to facilitate a best case scenario, they should alsowork to hedge against a worst case scenario. Toward that end, the followingrecommendations are offered:

• Facilitate farm diversification. There is no single crop that can replace lost tobaccoincome. There are, nevertheless, opportunities available to farmers wishing to diversify andpolicymakers should facilitate this diversification. For example, conventional crops andlivestock can be used to partially offset lost tobacco income. Moreover, supplemental cropsand animal products, including, but not limited to, fruits, vegetables, aquaculture andspecialty products can be pursued. A fundamental obstacle to farm diversification is asuitable infrastructure necessary for transporting, storing, and selling fruits and vegetables.Policymakers can help facilitate farm diversification by targeting rural development fundstoward several different infrastructure investments. Some basic examples include coolers,storage facilities, and trucks to haul produce to markets. A specific example would includethe proposed farmers' market in Northern Kentucky. By ensuring that such projects reachfruition, the state can play a positive role in facilitating farm diversification.10

• Develop a framework to increase local purchases. Over 70 percent of the food consumedin Kentucky is brought in from outside the state.11 A significant marketing effort would berequired, but Kentucky's farmers can help satisfy some of this consumer demand if theproper framework is developed. Policymakers can help develop a framework to increaselocal purchases by facilitating farm diversification and funding programs like farmers'markets and fruit/vegetable cooperatives. Moreover, the state can also engage in a "BuyKentucky" campaign to publicize the benefits of increasing local purchases. Some of theancillary benefits would include increased agricultural sustainability, higher "vegetableincome" for Kentucky's farmers, fresher products for Kentucky's consumers, and ultimatelya strengthening of Kentucky's rural economies.

46.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Hedging Against a Worst Case:Facilitate Farm Diversification

• Facilitate farm diversity– conventional crops or livestock

» import substitution– supplemental crops and animal products

» fruits and vegetables, aquaculture, specialtyproducts

• Develop a framework to increase localpurchases

– farmers markets & co-ops and a “Buy Kentucky”campaign

• Develop farm commodity exports• Focus on the “at-risk” communities

47

• Work to develop farm commodity exports. In 1992 Kentucky exported $879 million inagricultural products, which is equivalent to 27% of the state's agricultural production.12

Unfortunately, while U.S. exports increased by 12% from 1991 to 1992, Kentucky's exportsremained static.13 The largest increases on a national level were seen in wheat, soybeans,and live animals. Kentucky has considerable opportunity for increased production in eachof these areas.14 Accordingly, Kentucky's policymakers should ensure that Kentucky'sagricultural strategic development plan, Ag. Project 2000: A Comprehensive Master Planfor Kentucky Agricultural Economic Development, receives adequate attention and support.

• Focus attention on those communities especially vulnerable to a significant decline in theburley quota. Some geographic areas of the Commonwealth will suffer severe economicdistress as a result of a significant long-term decline in the burley quota. State governmentshould recognize that these communities are in need of special assistance and extraordinaryconsideration. There are many state government programs designed to create new jobs, toretain and upgrade existing industries, to provide for the deployment of new technologiesfor the purpose of enhancing workers’ performance and competitiveness, and to reversetrends of prolonged periods of area dilapidation and economic decay. Policymakers shouldensure that any programs designed to accomplish economic revitalization can be applied tothe communities identified in this report as particularly vulnerable to a significant decline inthe burley quota.

48

A substantial reinvestment effort centered on this type of infrastructure development wouldbe quite expensive. Where then, given the state’s budget situation, would Kentucky obtainfunding for these projects? One will remember figure 10 which showed that 96% of thesurveyed experts felt that a tax increase would take place. Given this, a follow-up questionwas asked, “If the federal excise tax on cigarettes is increased, do you think the tobaccostates can obtain a portion of this money to help cushion the blow of declining quotas?” (seeAppendix A, question 20).

A majority of the experts felt that the tobacco states would be able to obtain a portion of thisfunding, as evidenced by the chart.

48.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

A Substantial Reinvestment Effort Would be Expensive

Yes59%

No41%

Can Kentucky Obtain a Portion of the Funds Generated by anIncrease in the Excise Tax?

Can Kentucky Obtain a Portion of the Funds Generated by anIncrease in the Excise Tax?

n = 22

49

How much money might be available and needed for such an investment effort? The expertquestionnaire was used to answer these important questions.

First, how much money might be available? This is a highly speculative question. Eventhough a majority of experts feel it likely, there is no guarantee that the tobacco states canobtain some of the tax money in the form of a rebate. Moreover, even if Kentucky can getsome of this money, it is unclear as to how long a “tobacco rebate” would last. It could lastfor ten years, or it might only last for a few years. Nevertheless, we offer the followingscenario.

The amount of money available is essentially dependent upon the number of cigarettesconsumed, the amount of the tax increase, the percentage going to tobacco states, and thepercentage coming back specifically to Kentucky.

The amount of money needed is wholly dependent upon the types of reinvestment projects,whether any quota is retired by selling it back to the government, and the price at whichquota holders would be willing to sell their quotas.15

The parameter values derived from the expert questionnaire and the quantitative model usedto generate their impact on future burley quotas are used to answer these questions.

49.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

How Much Money Might BeAvailable and Needed?

• Expert questionnaire used to answer theseimportant questions

– how much money might be available?» cigarette consumption» amount of tax increase» percent of $’s back to tobacco states» percent of $’s to Kentucky

– how much money might be needed?» types of reinvestment projects» amount of quota sold back to government» price paid per pound

50

This chart illustrates projected cigarette consumption in the United States under the “Q2”scenario. The assumptions that generate this forecast are based on the expert consensus onthe impact of a tax increase (-11%), expectations of the annual rate of change in domesticcigarette consumption (-3%), and the anticipated annual rate of change in the per smokercigarette consumption (-3%). Each of these values represents the median value for therespective distribution.

(Refer to Appendix E, cells C25:M25, for an examination of the model output.)

50.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Projected Cigarette Consumption in the U.S.

498469

392 369 347308 289 272 256 241

327

0

100

200

300

400

500

600

1993 1995 1997 1999 2001 2003

Cig

aret

tes

(bill

ions

)

51

Each of the following assumptions is derived from the expert questionnaire and representsthe 50th percentile or median value of the responses:

• a $0.50 tax increase;

• 3% returned to the tobacco states; and

• Kentucky’s portion is 30%.

51.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Other Assumptions

• Tax increase– a $0.50 increase

• Percentage returned to tobacco states– a 3% return

• Kentucky’s portion– a 30% return

52

Given the assumptions delineated on the previous two slides, a possible scenario isillustrated on this chart. The cumulative amount is nearly $630 million. However, toreiterate, this assumes a highly uncertain length of time (9 years) and no one knows howlong a potential rebate would last.

52.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

How Much “Tobacco Rebate” Money Could be Availableto Kentucky?

$0

$25

$50

$75

$100

1995 1997 1999 2001 2003

Cur

rent

Dol

lars

(m

illio

ns)

$630 million (cumulative) in this scenario$630 million (cumulative) in this scenario

53

Even if the tobacco rebate program lasted for only a short while, it is still a significantamount of money. This chart illustrates a conservative level of funding under a rebateprogram. In the first year alone, $87 million could be received. This is more than the 1994general fund appropriation for the state government’s Tourism Cabinet ($55 million),16 themedian level of general fund appropriation for the state’s eight major universities ($45million),17 the amount of money allocated by the Appalachian Regional Commission toKentucky in 1993 ($12 million),18 and the total funding proposed for a farmers’ market inNorthern Kentucky ($6 million).19

53.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Projected Funding Available in the First Year Comparedto Funding in Other Programs

$87

$55$45

$12 $6

$0

$25

$50

$75

$100

Rebate(1995)

TourismCabinet(1994GF)

8 MajorUni. (GFMedian,1994)

ARC(1993)

Farmers’Market in

N.KY.

Cur

rent

Dol

lars

(m

illio

ns)

54

While there are many possible outcomes over the next decade for Kentucky’s burley quota,this analysis suggests that significant structural factors will likely depress Kentucky’s basicburley tobacco quota by around 40 percent over the next ten years. Moreover, a decline ofthis magnitude is likely to occur even without a significant increase in the federal excise taxon a pack of cigarettes -- i.e., the quota is going down regardless of how the tax situationturns out. The economic and social impact will be felt unevenly across Kentucky, withcertain "tobacco dependent" communities especially hard hit. Nevertheless, Kentucky’spolicymakers can mitigate the potentially deleterious consequences of a declining burleytobacco quota.

Policymakers can work toward achieving a best case scenario by: 1) replacing domesticcontent legislation with domestic content labelling; 2) facilitating leaf exports; and 3)providing funding for research and development into extended uses for tobacco.

54.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Major Conclusions

• Burley tobacco quota is likely to fall around40% over the next ten years

• Quota is going down -- regardless of theoutcome on the tax

• Impact will be felt unevenly across the state– certain communities will be especially hard hit

• Policymakers can exercise some leverage– replace domestic content legislation with domestic

content labelling– facilitate leaf exports– R&D dollars for extended uses

55

Over 95% of the surveyed tobacco experts feel that there will be an increase in the federalexcise tax on cigarettes, but a majority also feels that the tobacco states can receive some ofthis money back in the form of a “tobacco rebate.”

This is potentially a lot of money and can be used for multiple purposes. There are severalcommunity development programs that could help achieve farm diversity and localpurchases. Many of these programs could help cushion the blow of declining quotas forKentucky’s tobacco communities.

55.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Major Conclusions

• Over 95% of the surveyed experts feel thatthere will be an increase in the federal excisetax on cigarettes

– most experts think that the tobacco producing states canobtain a percentage back for reinvestment

– it is potentially a lot of money

• This money can be used for multiplepurposes

– there are many programs that could cushion the blow ofdeclining quotas for Kentucky’s communities

» community, economic, agricultural, and/or ruraldevelopment programs

57

ENDNOTES

1"Face Reality on Tobacco," Lexington Herald-Leader, May 15, 1994, p. E1.2The sensitivity analysis is conducted by changing one parameter value at a time from

the base line value to the median value. This allows us to gauge each parameter’s impact onfuture burley quotas. Thus, the definition of "likely change" in this analysis is from the currentvalue to the median value (derived by the expert response distribution for each factor).

3See "The Tobacco Trade: The Search for El Dorado," The Economist, May 16, 1992,vol. 323, no. 7759, p. 21, and Damon Darlin, "Pipe Dreams," Forbes, April 26, 1993, vol. 151,no. 9, p. 45.

4Maggie Mahar, "Tobacco’s Smoking Gun," Barron’s, May 16, 1994, pp. 33-37.5See for example, Gary S. Becker, Michael Grossman, and Kevin M. Murphy, “An

Empirical Analysis of Cigarette Addiction,” The American Economic Review (June, 1994). Theyestimated the short-run price-elasticity to be -0.4 and the long-run price-elasticity to be -0.75.Our forecast of cigarette consumption in Year 1 of the tax incorporates a short-run elasticity ofroughly -0.4. This means that a new graph of future cigarette consumption (with t1 = first year ofthe tax) has an intercept closer to the origin. Assuming that cigarette consumption decreases inthe future, the question arises as to how quickly the negative slope of the new consumption lineincreases during the next 10 years, since |δelasticity/δt|>0 as t→∞. We ultimately decided thatthe period we are looking at is too short to justify much movement toward the asymptotic effectof a tax increase. Furthermore, a separate study of cigarette consumption, reported in TheJournal of Political Economy, found a short-run price elasticity of -0.2 and a long-run priceelasticity of -0.45. Therefore, projections for the next ten years assuming a price-elasticity ofdemand of around -0.4 for the entire period seem quite reasonable.

6The $300 million decline reflects the difference between a 406 million pound quota at$1.80 per pound, which would have a value of $731 million, and a 240 million pound quota atthe same price per pound, which would be worth approximately $300 million less, at $432million.

7Tobacco income in this case is narrowly defined solely as the value of the tobacco crop.It is calculated by multiplying the basic quota (pounds) by the average value per pound ($1.80).This approach is consistent with other work done in this area. See, for instance, Snell and Isaacs,Feb. 1994.

8Refer to "Tobacco Economies: What's Ahead?," Agricultural Outook, September 1993.9This 5% threshold is consistent with work done by the United States Department of

Agriculture on the economic impact of a declining tobacco quota. See "Tobacco Economies:What's Ahead," Agricultural Outlook, Economic Research Service, United States Department ofAgriculture, September 1993, pp. 27-31.

10Refer to Investing in the Farms and Communities of America’s Tobacco Regions,Community Farm Alliance, November 1993 draft.

11Interview with Commissioner of Agriculture, Ed Logsdon, September 1993.12William Sprague, President, Kentucky Farm Bureau Federation, "Trends in

Agriculture," May 1994, unpublished paper.13Ibid.14Ibid.15Jasper Womach, "Economic Assistance for Tobacco Production regions to Offset

Losses from Higher Cigarette Taxes?," Congressional Research Service, Memorandum, March22, 1994.

16Budget of the Commonwealth, 1992-1994.

58

17Budget of the Commonwealth, 1992-1994. The median level of general fundappropriation for the state’s eight major universities is calculated as: KSU $18.6 million; NKU$29.6 million; Morehead $32.4 million; Murray $38.6 million; WKU $51.1 million; EKU $53.7million; UL $137.5 million; and UK $246.6 million.

18The total is $12,481,000 (provided by Tom Craighead, Department of LocalGovernment).

19The state’s portion is $3 million while matching federal funds account for the other $3million.

20A USDA analysis assumes that the manufacturers will move production "off-shore."See "Domestic Marketing Assessment for Domestic Cigarette Manufacturers," Tobacco andPeanut Analysis Division, USDA-ASCS, December 1, 1993. Some of the manufacturers,however, dispute this assumption. Refer to Mike Brown, "Law to Hurt -- not Help -- U.S.Tobacco, Study Says," Courier-Journal, January 1, 1994, p. A1.

59

APPENDIX ATOBACCO QUESTIONNAIRE: ELEMENTS OF POTENTIAL CHANGE

Cigarette Tax1. Do you think there will be an increase in the federal excise tax on a pack of cigarettes? ____2. If yes, how much do you think this increase will be? ____3. What percentage decrease in cigarette consumption do you anticipate as a result of this tax

increase? ____Burley Leaf in Cigarettes

4. Total burley currently accounts for about 0.75 pounds (or about 38.5%) of the total tobacco leaf(FSW) used per 1,000 cigarettes manufactured. Do you think the amount of burley used per 1,000cigarettes will be different 10 years from now? ____

5. If yes, how much burley do you think will be used per 1,000 cigarettes? ____Domestic Cigarette Usage

6. What do you think the average annual rate of change in total domestic cigarette consumption willbe over the next 10 years (percent)? ____

7. In the U.S., the average smoker consumes about 7,500 cigarettes annually. What do you think theaverage annual rate of change will be over the next 10 years (percent)? ____

Foreign Cigarette Usage8. What do you think the average annual rate of change in foreign cigarette consumption will be over

the next 10 years (percent)? ____Exported Unmanufactured Leaf

9. What do you think the average annual rate of change in exported unmanufactured leaf will be overthe next 10 years (percent)? ____

Domestic Content10. In light of the General Agreement on Tariffs and Trade (GATT), do you think that the current

domestic content legislation (75%) will remain intact? ____11. What do you believe the percentage of domestic content in cigarettes would be in ten years if there

was not a domestic content requirement? ____12. Do you think that the cigarette manufactures will move production overseas to escape the

requirements of the legislation? ____13. If yes:

a. How much production do you think will be moved outside the U.S. over the next 10 years (interms of numbers of cigarettes)? ____b. Compared to the amount of U.S. leaf that is used currently in the production of these cigarettes(about 60%), how much U.S. leaf will be used if production is moved overseas (percent)? ____

14. What impact, if any, will the domestic content requirement have on the total amount of burley usedper 1,000 cigarettes? ____

15. What impact, if any, will the domestic content requirement have on the total amount of leaf usedper 1,000 cigarettes? ____

16. What impact, if any, will the domestic content requirement have on U.S. exports ofunmanufactured leaf? ____

Extended Uses for Tobacco17. Do you think that some of the extended uses proposed for tobacco (e.g., plant bioengineering) will

significantly increase the demand for tobacco over the next 10 years? ____18. How much additional demand do you think will be generated as a result of extended uses for

tobacco (pounds)? ____19. How much of this additional demand do you think Kentucky’s tobacco growers will help satisfy

(percent)? ____Cushioning the Impact of Lost Quota for Tobacco Farmers

20. If the federal excise tax on cigarettes is increased, do you think the tobacco states can obtain aportion of this money to help cushion the blow of declining quotas? ____

21. If yes, what percentage do you think will come back to all tobacco states? ____22. Of this total amount, what percentage do you think Kentucky can hope to obtain? ____

60

23. Some have suggested that quotas be purchased from farmers to ease the impact of decliningquotas. At what price per pound do you think quota holders would be willing to sell their quotas?____

Other24. Periodically bills are introduced in the U.S. Congress that are designed to eliminate the tobacco

price support program. Using the scale below, how probable do you believe it is that the tobaccoprice support program will be abolished within the next 10 years?

Very LowProbability Low Moderate High

Very HighProbability

25. Kentucky enjoys the distinction of growing the highest quality burley in the world. However,foreign producers have increased the quality of their burley tobacco in recent years. Using thescale below, how probable do you believe it is that burley produced outside the U.S. will be ofequivalent quality to Kentucky burley within the next 10 years?

Very LowProbability Low Moderate High

Very HighProbability

26. Several potentially important elements of change that could affect the future of burley tobacco arelisted below. How much influence or leverage do you think Kentucky’s federal and state levelpolicymakers can exercise on these factors? Use the scale below to indicate the degree to whichyou believe policymakers can affect the course of these factors.

Elements of Potential ChangeNo

LeverageVery LowLeverage Low Medium High

VeryHigh

LeverageTax increase on a pack of cigarettes 0 1 2 3 4 5

Tax increase on other tobacco products 0 1 2 3 4 5

Amount of burley leaf used in cigarette production 0 1 2 3 4 5

Amount of total leaf used in cigarette production 0 1 2 3 4 5

Total number of cigarette smokers in the U.S. 0 1 2 3 4 5

Cigarettes consumed per smoker (U.S. smokers) 0 1 2 3 4 5

Level of foreign cigarette consumption 0 1 2 3 4 5

Amount of exported unmanufactured leaf 0 1 2 3 4 5

Level of domestic content (cigarettes) 0 1 2 3 4 5

Movement of cigarette production overseas 0 1 2 3 4 5

Amount of U.S. tobacco used in overseas production 0 1 2 3 4 5

Development of extended uses for tobacco 0 1 2 3 4 5

27. Please use the back of this page (or another page) to delineate specific actions you feelpolicymakers could take in order to exercise leverage on any of the factors listed above --particularly if you circled "4" or "5" on a factor.

If you have any additional comments or would like to elaborate on any of your answers,they are encouraged and welcomed.

61

APPENDIX BQUESTIONNAIRE RESULTS

Summary statistics are presented in Table B.1 for the questionnaire results. Please note thatquestions 1, 4, 10, 12, 17, and 20 are answered with a "Yes" or "No." The value in the "meancolumn" reflects the number of respondents who indicated "Yes" to the question. Thus, a 96%mean value shown for question 1 indicates that 96% of the respondents answered "Yes" to thequestion, "Do you think there will be an increase in the federal excise tax on a pack ofcigarettes?"

62

Table B.1Summary Statistics on Questionnaire Results

Standard Coeff. of

Question Min Q1 Median Q3 Mean Deviation Variation Max n

1 96% 20% 4.7 24

2 $0.00 $0.25 $0.50 $0.75 $0.55 $0.30 1.9 $1.00 24

3 -25.0% -15.0% -11.0% -5.0% -10.8% 6% 1.7 -1.0% 24

4 50% 51% 1.0 22

5 0.500 0.669 0.750 0.750 0.713 0.078 9.1 0.877 20

6 -7.0% -4.0% -3.0% -2.0% -3.0% 2% 1.9 0.0% 23

7 -12.5% -4.8% -3.0% -2.1% -4.0% 3% 1.3 0.0% 16

8 -1.0% 1.0% 1.5% 3.0% 2.2% 2% 1.0 7.5% 19

9 -10.0% -1.5% -1.0% 2.0% -0.6% 4% 0.2 7.5% 21

10 13% 34% 0.4 24

11 25.0% 40.0% 50.0% 53.3% 48.4% 12% 4.2 70.0% 20

12 74% 45% 1.6 23

13a. 250 0 100 175 136 69 2.0 1 15

13b. 0% 16.3% 25% 28.8% 23% 16% 1.4 60% 14

14 -20.0% 0.0% -0.3% 8% 0.0 22.5% 14

15 -5.0% 0.0% 0.0% 0.0% 1.0% 6% 0.2 22.5% 15

16 -2.0% 0.0% -0.4% 1% 0.5 0.0% 7

17 5% 21% 0.2 22

18 0.00 0 0.00 0 0.16 0.35 0.4 1.00 21

19 0% 0% 16% 22% 0.7 50% 13

20 59% 50% 1.2 22

21 0.0% 2.4% 3.0% 5.4% 3.9% 3% 1.3 10.0% 16

22 20.0% 30.0% 30.0% 33.0% 32.4% 7% 4.7 50.0% 13

23 $1.75 $2.50 $2.50 $3.50 $3.42 $2.02 1.7 $10.00 16

24 3 2.9 1.4 2.1 24

25 2 2.6 1.1 2.5 24

26a. 1 3.0 3.2 1.2 2.6 5 24

26b. 2 3.0 3.2 1.2 2.7 5 24

26c. 0 2.0 1.9 1.2 1.6 4 24

26d. 0 1.5 1.6 1.3 1.3 4 24

26e. 0 1.3 1.5 1.2 1.2 4 24

26f. 0 1.3 1.6 1.2 1.3 4 24

26g. 0 1.0 1.1 1.1 1.0 4 24

26h. 0 3.0 2.7 1.2 2.2 5 24

26i. 1 3.0 3.3 0.9 3.8 5 24

26j. 1 2.0 2.3 1.0 2.3 4 24

26k. 0 1.0 1.6 1.3 1.2 4 24

26l. 0 2.5 2.6 1.3 2.0 5 26

63

APPENDIX CSUPPLEMENTARY TABLE ON COUNTY LEVEL DATA

County level data are presented in Table C.1. Some county data are presented in bold type.This indicates that this is a county "at risk" (refer to page 37). A parenthesis indicates a negativenumber (i.e., (216) = -216).

• Basic Quota 1993 - This is the county’s basic burley quota for 1993. Source: KentuckyAgricultural Statistics, 1992-1993, prepared by the Kentucky Agricultural Statistics Service.

• Estimated Basic Quota 2003 - This number reflects the "Q2" scenario. Therefore, it shows a41% decline in the county’s 1993 basic quota.

• Tobacco Income Lost - This is the amount of lost quota multiplied by $1.80 per pound. It isused solely for illustrative purposes to give context and meaning to the lost poundage. Itdoes not indicate that tobacco will be worth $1.80 per pound for any specified period in thefuture.

• Potential Tobacco Rebate Funds - These numbers are based on the "Q2" scenario (refer topages 49-53). The county’s portion of the total $630 million tobacco rebate is derived byallocating it proportionately with the county’s portion of the state’s total burley quota. Forinstance, Adair County has 1.097% of the state’s basic quota (4.458 million pounds out ofthe state’s basic quota of 406.471 million pounds), and it is assumed that it would receivethis same percentage of any tobacco rebate. In this example, 1.097% of $630.5 million isabout $6.9 million.

• Total Personal Income (1990) 1,000 Residence Adjusted - This is the county level incomefor 1990, Source: 1993 Kentucky Deskbook of Economic Statistics.

• Tobacco's Portion of Total Personal Income (est.) - This is Total Personal Income divided bythe estimated value of the burley quota in 1993 (basic quota times $1.80). It is used as acomparative measure of tobacco dependence across counties.

• Poverty Rate (persons) - This is the poverty rate as reported in the 1990 census.

64

Table C.1Selected County Level Data

Estimated Tobacco PotentialBasic Quota Basic Quota Income Tobacco Rebate

County 1993 2003 Lost Funds

Adair 4,458,712 2,625,085 $3,300,528 $6,915,811Allen 3,289,535 1,936,728 $2,435,053 $5,102,326Anderson 3,239,373 1,907,194 $2,397,921 $5,024,521Ballard 2,581,689 1,519,980 $1,911,076 $4,004,401Barren 11,533,941 6,790,656 $8,537,913 $17,890,044Bath 6,001,673 3,533,510 $4,442,693 $9,309,064Bell 17,504 10,306 $12,957 $27,150Boone 2,952,601 1,738,356 $2,185,641 $4,579,715Bourbon 11,195,142 6,591,187 $8,287,119 $17,364,540Boyd 64,007 37,684 $47,381 $99,280Boyle 4,424,977 2,605,224 $3,275,556 $6,863,485Bracken 6,190,978 3,644,964 $4,582,825 $9,602,691Breathitt 1,231,342 724,958 $911,492 $1,909,908Breckinridge 6,941,749 4,086,984 $5,138,577 $10,767,195Bullitt 1,278,615 752,790 $946,485 $1,983,232Butler 777,145 457,547 $575,276 $1,205,413Caldwell 1,048,799 617,485 $776,366 $1,626,769Calloway 485,250 285,693 $359,203 $752,661Campbell 659,211 388,113 $487,976 $1,022,488Carlisle 485,426 285,797 $359,333 $752,934Carroll 3,639,772 2,142,931 $2,694,314 $5,645,571Carter 3,184,379 1,874,816 $2,357,213 $4,939,221Casey 5,679,080 3,343,582 $4,203,896 $8,808,697Christian 5,886,663 3,465,798 $4,357,558 $9,130,674Clark 7,035,663 4,142,276 $5,208,096 $10,912,863Clay 2,604,869 1,533,628 $1,928,235 $4,040,355Clinton 2,217,407 1,305,508 $1,641,419 $3,439,372Crittenden 34,862 20,525 $25,806 $54,074Cumberland 2,403,304 1,414,955 $1,779,028 $3,727,712Daviess 6,633,936 3,905,758 $4,910,721 $10,289,753Edmonson 1,697,674 999,513 $1,256,690 $2,633,225Elliott 2,006,311 1,181,224 $1,485,157 $3,111,945Estill 1,500,657 883,518 $1,110,850 $2,327,636Fayette 11,249,667 6,623,289 $8,327,481 $17,449,113Fleming 7,254,162 4,270,918 $5,369,839 $11,251,772Floyd 7,866 4,631 $5,823 $12,201Franklin 5,444,381 3,205,402 $4,030,162 $8,444,660Fulton 4,725 2,782 $3,498 $7,329Gallatin 2,089,763 1,230,357 $1,546,931 $3,241,386Garrard 6,963,703 4,099,909 $5,154,829 $10,801,248Grant 5,555,706 3,270,945 $4,112,569 $8,617,334Graves 797,888 469,760 $590,631 $1,237,587Grayson 3,736,937 2,200,137 $2,766,239 $5,796,281Green 5,697,315 3,354,318 $4,217,394 $8,836,981Greenup 1,847,163 1,087,525 $1,367,348 $2,865,094

65

Table C.1(continued)



Hancock 2,225,366 1,310,194 $1,647,310 $3,451,717Hardin 4,152,847 2,445,006 $3,074,114 $6,441,390Harlan 4,502 2,651 $3,333 $6,983Harrison 8,965,082 5,278,230 $6,636,334 $13,905,543Hart 8,456,390 4,978,735 $6,259,779 $13,116,522Henderson 764,161 449,903 $565,664 $1,185,273Henry 9,002,010 5,299,971 $6,663,670 $13,962,821Hickman 56,366 33,186 $41,725 $87,428Hopkins 352,454 207,509 $260,901 $546,684Jackson 2,983,605 1,756,610 $2,208,591 $4,627,805Jefferson 581,185 342,175 $430,218 $901,463Jessamine 6,778,135 3,990,655 $5,017,463 $10,513,417Johnson 684,241 402,850 $506,504 $1,061,311Kenton 1,374,846 809,446 $1,017,719 $2,132,494Knott 1,026 604 $759 $1,591Knox 961,539 566,110 $711,772 $1,491,422Larue 3,058,181 1,800,517 $2,263,795 $4,743,478Laurel 4,243,239 2,498,225 $3,141,026 $6,581,595Lawrence 689,854 406,154 $510,659 $1,070,017Lee 610,711 359,559 $452,074 $947,260Leslie 116,465 68,569 $86,212 $180,646Letcher 2,951 1,737 $2,184 $4,577Lewis 4,450,066 2,619,995 $3,294,128 $6,902,400Lincoln 6,277,548 3,695,933 $4,646,908 $9,736,968Livingston 16,049 9,449 $11,880 $24,893Logan 3,279,571 1,930,861 $2,427,678 $5,086,871Lyon 443,666 261,210 $328,420 $688,161Madison 10,323,474 6,077,989 $7,641,874 $16,012,515Magoffin 1,708,304 1,005,771 $1,264,559 $2,649,713Marion 5,278,326 3,107,637 $3,907,241 $8,187,096Marshall 416,796 245,390 $308,530 $646,483Martin 1,113 655 $824 $1,726Mason 8,209,997 4,833,670 $6,077,388 $12,734,347McCracken 1,079,066 635,305 $798,770 $1,673,716McCreary 68,150 40,124 $50,448 $105,706McLean 1,421,346 836,823 $1,052,141 $2,204,619Meade 1,756,724 1,034,279 $1,300,402 $2,724,816Menifee 1,419,689 835,848 $1,050,914 $2,202,049Mercer 6,518,549 3,837,823 $4,825,307 $10,110,779Metcalfe 5,274,938 3,105,642 $3,904,733 $8,181,841Monroe 3,543,284 2,086,123 $2,622,889 $5,495,910Montgomery 6,258,472 3,684,702 $4,632,787 $9,707,379Morgan 3,775,437 2,222,804 $2,794,739 $5,855,998Muhlenberg 925,482 544,881 $685,081 $1,435,495Nelson 4,453,192 2,621,835 $3,296,442 $6,907,249

66




Nicholas 5,182,987 3,051,505 $3,836,667 $8,039,218Ohio 2,524,004 1,486,018 $1,868,375 $3,914,927Oldham 1,397,132 822,567 $1,034,216 $2,167,061Owen 7,593,217 4,470,538 $5,620,822 $11,777,673Owsley 1,787,627 1,052,473 $1,323,277 $2,772,749Pendleton 4,815,139 2,834,933 $3,564,370 $7,468,657Perry 74,118 43,637 $54,865 $114,963Pike 0 0 $0 $0Powell 946,229 557,096 $700,439 $1,467,675Pulaski 6,400,009 3,768,032 $4,737,558 $9,926,914Robertson 2,443,290 1,438,497 $1,808,627 $3,789,734Rockcastle 3,108,566 1,830,181 $2,301,093 $4,821,629Rowan 1,543,905 908,981 $1,142,864 $2,394,717Russell 3,265,924 1,922,826 $2,417,576 $5,065,703Scott 9,973,151 5,871,734 $7,382,550 $15,469,137Shelby 12,078,212 7,111,098 $8,940,805 $18,734,251Simpson 1,919,478 1,130,101 $1,420,879 $2,977,260Spencer 3,988,289 2,348,122 $2,952,301 $6,186,148Taylor 4,764,438 2,805,083 $3,526,839 $7,390,016Todd 2,486,382 1,463,868 $1,840,526 $3,856,573Trigg 1,554,491 915,213 $1,150,700 $2,411,137Trimble 3,713,654 2,186,429 $2,749,004 $5,760,168Union 13,203 7,773 $9,773 $20,479Warren 5,727,037 3,371,817 $4,239,396 $8,883,082Washington 6,526,124 3,842,283 $4,830,914 $10,122,528Wayne 2,823,544 1,662,373 $2,090,107 $4,379,537Webster 305,029 179,587 $225,795 $473,124Whitley 552,992 325,576 $409,348 $857,734Wolfe 1,967,241 1,158,221 $1,456,235 $3,051,345Woodford 9,996,321 5,885,376 $7,399,701 $15,505,075

TOTAL 406,471,636 239,315,542 $300,884,611 $630,463,096

Median 2,505,193 1,474,943 $1,889,725 $3,959,664Mean 3,331,735 1,961,586 $2,507,372 $5,253,859Standard Deviation 36,627,233 21,564,765 $27,332,140 $57,270,810

67


Total Personal Tobacco’s PortionIncome (1990) 1,000 of Total Poverty Rate

County Residence Adjusted Personal Income (est.) (persons)

Adair $181,367 4.4% 25.1%Allen $170,319 3.5% 24.6%Anderson $212,239 2.7% 9.3%Ballard $122,889 3.8% 18.5%Barren $445,913 4.7% 21.5%Bath $108,803 9.9% 27.3%Bell $337,459 0.0% 36.2%Boone $1,060,928 0.5% 7.4%Bourbon $284,855 7.1% 17.5%Boyd $859,742 0.0% 16.5%Boyle $373,299 2.1% 17.1%Bracken $87,349 12.8% 21.4%Breathitt $165,101 1.3% 39.5%Breckinridge $202,125 6.2% 23.2%Bullitt $670,021 0.3% 10.4%Butler $128,050 1.1% 23.8%Caldwell $161,862 1.2% 19.9%Calloway $433,953 0.2% 17.7%Campbell $1,346,052 0.1% 11.0%Carlisle $66,095 1.3% 17.7%Carroll $133,373 4.9% 22.0%Carter $252,378 2.3% 26.8%Casey $145,376 7.0% 29.4%Christian $787,553 1.3% 18.1%Clark $435,945 2.9% 17.7%Clay $188,828 2.5% 40.2%Clinton $80,984 4.9% 38.1%Crittenden $102,703 0.1% 18.7%Cumberland $66,965 6.5% 31.6%Daviess $1,381,716 0.9% 15.4%Edmonson $81,864 3.7% 27.0%Elliott $50,888 7.1% 38.0%Estill $147,025 1.8% 29.0%Fayette $4,377,590 0.5% 14.1%Fleming $141,607 9.2% 25.4%Floyd $545,858 0.0% 31.2%Franklin $744,935 1.3% 10.9%Fulton $116,509 0.0% 30.3%Gallatin $75,350 5.0% 14.3%Garrard $154,520 8.1% 18.1%Grant $204,477 4.9% 15.1%Graves $482,039 0.3% 16.9%Grayson $228,345 2.9% 23.8%Green $125,862 8.1% 21.6%Greenup $514,306 0.6% 17.6%

68




Hancock $114,643 3.5% 16.8%Hardin $1,193,378 0.6% 13.5%Harlan $422,607 0.0% 33.1%Harrison $214,349 7.5% 16.9%Hart $163,180 9.3% 27.1%Henderson $693,411 0.2% 14.6%Henry $176,460 9.2% 19.7%Hickman $72,590 0.1% 20.1%Hopkins $781,825 0.1% 17.2%Jackson $100,384 5.3% 38.2%Jefferson $12,732,024 0.0% 13.7%Jessamine $471,906 2.6% 13.2%Johnson $284,559 0.4% 28.7%Kenton $2,412,224 0.1% 9.9%Knott $164,397 0.0% 40.4%Knox $295,262 0.6% 38.9%Larue $160,280 3.4% 19.9%Laurel $526,408 1.5% 24.8%Lawrence $136,697 0.9% 36.0%Lee $65,084 1.7% 37.4%Leslie $135,244 0.2% 35.6%Letcher $293,232 0.0% 31.8%Lewis $136,718 5.9% 30.7%Lincoln $207,296 5.5% 27.2%Livingston $116,947 0.0% 15.5%Logan $320,777 1.8% 16.1%Lyon $77,814 1.0% 14.3%Madison $732,220 2.5% 21.2%Magoffin $115,437 2.7% 42.5%Marion $204,369 4.6% 25.6%Marshall $398,730 0.2% 14.1%Martin $150,504 0.0% 35.4%Mason $235,686 6.3% 20.3%McCracken $1,099,416 0.2% 15.8%McCreary $119,582 0.1% 45.5%McLean $128,034 2.0% 19.2%Meade $277,336 1.1% 12.8%Menifee $41,819 6.1% 35.0%Mercer $305,177 3.8% 16.7%Metcalfe $94,664 10.0% 27.9%Monroe $139,075 4.6% 26.9%Montgomery $258,505 4.4% 21.0%Morgan $110,550 6.1% 38.8%Muhlenberg $380,905 0.4% 20.7%Nelson $434,227 1.8% 15.1%

69




Nicholas $89,879 10.4% 22.6%Ohio $240,521 1.9% 23.6%Oldham $686,883 0.4% 6.3%Owen $105,398 13.0% 19.5%Owsley $42,941 7.5% 52.1%Pendleton $146,230 5.9% 18.9%Perry $409,597 0.0% 32.1%Pike $947,999 0.0% 25.4%Powell $115,706 1.5% 26.2%Pulaski $641,504 1.8% 22.7%Robertson $21,158 20.8% 24.8%Rockcastle $157,189 3.6% 30.7%Rowan $212,327 1.3% 28.9%Russell $187,836 3.1% 25.6%Scott $431,439 4.2% 14.5%Shelby $426,411 5.1% 14.2%Simpson $200,808 1.7% 15.5%Spencer $87,856 8.2% 19.2%Taylor $280,291 3.1% 19.5%Todd $126,274 3.5% 18.8%Trigg $137,049 2.0% 18.0%Trimble $85,875 7.8% 16.3%Union $245,188 0.0% 22.1%Warren $1,130,834 0.9% 17.5%Washington $136,584 8.6% 18.8%Wayne $166,670 3.0% 37.3%Webster $235,091 0.2% 16.5%Whitley $412,874 0.2% 33.0%Wolfe $58,422 6.1% 44.3%Woodford $471,196 3.8% 7.9%

TOTAL $55,319,379 n.a. n.a.

Median $201,467 2.2% 21.1%Mean $460,995 3.3% 23.3%Standard Deviation $5,158,197 3.5% 9.3%

71

APPENDIX DMODEL ASSUMPTIONS AND QUESTIONNAIRE RESULTS

IN THEIR HISTORICAL CONTEXT

In this section we present a series of slides that illustrate some model assumptions andquestionnaire results.

72

This pie charts shows the assumed distribution of Kentucky’s burley. Refer to Appendix E,cells B10:B13.

72.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Distribution of Kentucky Burley:Model Assumptions

Cigs (domestic)

48%

Cigs (exported)

19%

Exported Leaf29%

Other4%

73

This chart illustrates the expert response to question 2 of the expert questionnaire: “If thereis an increase in the federal excise tax on a pack of cigarettes, how much do you think thisincrease will be?” (Refer to Appendix A, “Tobacco Questionnaire, Question 2.)

The summary statistics derived from the expert response are listed in Appendix B, TableB.1, “Summary Statistics on Questionnaire Results,” Question 2.

This chart lists the first quartile (Q1) value ($0.25), the median ($0.50), and the thirdquartile (Q3) value ($0.75).

73.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Proposed Tax Increase:How Much is Expected?

0

1

2

3

4

5

6

7

$0.00 $0.24 $0.25 $0.50 $0.63 $0.75 $0.99 $1.00

Fre

quen

cyQ1 = $0.25

median = $0.50Q3 = $0.75

74

This chart illustrates the expert response to the question: “What percentage decrease incigarette consumption do you anticipate as a result of this tax increase?” (Refer to AppendixA, “Tobacco Questionnaire, Question 3.)


This chart lists the first quartile (Q1) value (-15%), the median (-11%), and the third quartile(Q3) value (-5%).

74.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Anticipated Impact of a Cigarette Tax on Consumption

0

1

2

3

4

5

6

7

-25.0 -15.0 -12.5 -10.0 -5.0 -2.5Expected Reduction in Cigarette Consumption

(percentage)

Fre

quen

cy

Q1 = -15%median = -11%

Q3 = -5%

75

This chart illustrates the expert response to the question: “What do you think the averageannual rate of change in total domestic cigarette consumption will be over the next 10 years(percent)?” (Refer to Appendix A, “Tobacco Questionnaire, Question 6.)


This chart lists the first quartile (Q1) value (-2%), the median (-3%), and the third quartile(Q3) value (-4%).

To place these expert opinions in context, the chart also illustrates the predicted slope basedon a bivariate regression between the number of Americans who smoke (in the last month,12 years and older) and the year (1982 to 1992).

Source of the historical data: Preliminary Estimates From The 1992 National HouseholdSurvey On Drug Abuse, U.S. Department of Health and Human Services, Advance ReportNumber 3, June 1993.

75.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Americans Who Smoke:Probable Rates of Change

0

10

20

30

40

50

60

70

79 82 85 88 91 94 97 0 3

Year

Sm

oked

in t

he L

ast

Mon

th

(mill

ions

)

NHSInterpolated-2%-3%-4%Predicted (’82-’92)

76

This chart illustrates the expert response to the question: “In the U.S., the average smokerconsumes about 7,500 cigarettes annually. What do you think the average annual rate ofchange will be over the next 10 years (percent)?” (Refer to Appendix A, “TobaccoQuestionnaire, Question 7.)


This chart lists the first quartile (Q1) value (-2.1%), the median (-3%), and the third quartile(Q3) value (-4.8%).

To place these expert opinions in context, the chart also illustrates the predicted slope basedon a bivariate regression between the average number of cigarettes consumed by smokers inthe U.S. and the year (1982 to 1992). It is interesting that the experts are expecting a muchmore precipitous decline than what would be expected given the trend for the last ten years.

Source of the historical data: Preliminary Estimates From The 1992 National HouseholdSurvey On Drug Abuse, U.S. Department of Health and Human Services, Advance ReportNumber 3, June 1993, and U.S. Tobacco Statistics, 1935-92, United States Department ofAgriculture, Statistical Bulletin Number 869, by Laverne Creek, Tom Capehart, and VernerGrise.

76.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Declines Expected in Cigarettes Consumed per Smoker

0

2,000

4,000

6,000

8,000

10,000

12,000

79 82 85 88 91 94 97 00 03Year

Cig

aret

tes

Con

sum

ed P

er

Sm

oker

(an

nual

ave

rage

)

NHS & TI DataInterpolated-2.1%-3.0%-4.8%Predicted (’82-’92)

77

This chart illustrates the expert response to the question: “What do you think the averageannual rate of change in foreign cigarette consumption will be over the next 10 years(percent)?” (Refer to Appendix A, “Tobacco Questionnaire, Question 8.)


This chart lists the first quartile (Q1) value (1%), the median (1.5%), and the third quartile(Q3) value (3%).

To place these expert opinions in context, the chart also illustrates the predicted slope basedon a bivariate regression between the average number of cigarettes exported for foreignconsumption and the year (1984 to 1993).

Source of the historical data: Tobacco Situation and Outlook Report, TS-220, September1992.

77.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

U.S. Cigarette Exports are Likely to Slacken

0

50

100

150

200

250

300

350

400

450

70 75 80 85 90 95 00

U.S

. C

igar

ette

Exp

orts

(bi

llion

s)Cigarette Exports

1%

2%

3%

Predicted (’84-’93)

78

This chart illustrates the expert response to the question: “Total burley currently accountsfor about 0.75 pounds (or about 38.5%) of the total tobacco leaf (FSW) used per 1,000cigarettes manufactured. Do you think the amount of burley used per 1,000 cigarettes willbe different 10 years from now? -- If yes, how much burley do you think will be used per1,000 cigarettes?” (Refer to Appendix A, “Tobacco Questionnaire, Questions 4 & 5.)


This chart lists the first quartile (Q1) value (.67), the median (.75), and the third quartile(Q3) value (.75).

78.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Burley Content in Cigarettes Will Probably Be Stable

0123456789

1011

0.50 0.60 0.64 0.65 0.68 0.70 0.71 0.75 0.88

Burley per 1,000 Cigarettes (pounds)

Fre

quen

cyQ1 = .67

median = .75Q3 = .75

79

This chart illustrates the expert response to two separate questions:

• “What impact, if any, will the domestic content requirement have on the total amount ofleaf used per 1,000 cigarettes?” (Refer to Appendix A, “Tobacco Questionnaire, Question15.) The summary statistics derived from the expert response are listed in Appendix B,Table B.1, “Summary Statistics on Questionnaire Results,” Question 15. This chart lists thefirst quartile (Q1) value (0), the median (0), and the third quartile (Q3) value (0).

• “How much additional demand (for burley tobacco) do you think will be generated as aresult of extended uses for tobacco (pounds)?” (Refer to Appendix A, “TobaccoQuestionnaire, Question 18.) The summary statistics derived from the expert response arelisted in Appendix B, Table B.1, “Summary Statistics on Questionnaire Results,” Question18. This chart lists the first quartile (Q1) value (0), the median (0), and the third quartile(Q3) value (0).

79.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

No Changes are Expected inCigarette Size & Extended Uses

• Cigarette size– unlikely to change

» Q1 = 0, median = 0, Q3 = 0

• Extended uses for tobacco– this is the wild card, but it is also unlikely to change over

the next 10 years» Q1 = 0, median = 0, Q3 = 0

80

This chart illustrates the expert response to the question: “In light of the General Agreementon Tariffs and Trade (GATT), do you think that the current domestic content legislation(75%) will remain intact?” (Refer to Appendix A, “Tobacco Questionnaire, Question 10.)


This chart shows that 87% of the experts feel that it will not survive.

80.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Will the Domestic Content Legislation Survive GATT?

Yes13%

No87%

n = 24

81

The real questions center on how long will it survive and what happens after its demise.Some believe that Article 28 of GATT could be used to limit leaf imports at a specifiedlevel and would be legal within the GATT framework. This could result in a 70/30distribution (instead of 75%/25%), but the final outcome of the legislation remains to beseen.

A legitimate question is “if it is struck down, as 87% of the surveyed experts believe, howlong will it take to phase out?” The assumptions used in the three scenarios generated inthis analysis are 1 year (worst probable), 3 years (most probable), and 5 years (bestprobable).

Finally, where will domestic content go in the absence of this legislation? The experts wereasked: “What do you believe the percentage of domestic content in cigarettes would be inten years if there was not a domestic content requirement?” (Refer to Appendix A,“Tobacco Questionnaire, Question 11.)


This chart lists the first quartile (Q1) value (40%), the median (50%), and the third quartile(Q3) value (53%).

81.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

The Real Questions: How LongWill It Survive & Then What?

• Domestic content legislation will be reviewedby a GATT committee this summer

– expected to be found in violation of GATT

• How long will it take to phase out?– 1 year? 3 years? 5 years?

• Where will domestic content go in theabsence of this legislation?

– this question was asked of the tobacco experts (n=19)» Q1 = 40%, median = 50%, Q3 = 53%» minimum = 25%, maximum = 70%

82

This chart illustrates the expert response to the questions about the longevity of the domesticcontent legislation and where it might go in the absence of the legislation.

82.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Duration & Long-Term Direction: Model Assumptions

0%

20%

40%

60%

80%

94 95 96 97 98 99 0 1 2 3

Year

Dom

estic

Con

tent

Q1

Q2

Q3

83

This chart illustrates the expert response to the question: “What do you think the averageannual rate of change in exported unmanufactured leaf will be over the next 10 years(percent)?” (Refer to Appendix A, “Tobacco Questionnaire, Question 9.)


This chart lists the first quartile (Q1) value (-1.5%), the median (-1%), and the third quartile(Q3) value (2%).

To place these expert opinions in context, the chart also illustrates the predicted slope basedon a bivariate regression between leaf exports and the year (1984 to 1993).

Source of the historical data: Tobacco Situation and Outlook Report, TS-220, September1992.

83.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Exported Leaf:What Does the Future Hold?

0

20

40

60

80

100

120

140

160

180

1975 1980 1985 1990 1995 2000

U.S

. Unm

anuf

actu

red

Leaf

Exp

orts

(mill

ion

poun

ds)

Leaf Exports

-1.5%

-1.0%

2.0%

Predicted (’84-’93)

84

Some have suggested that the cigarette manufacturers will transfer some cigaretteproduction “off-shore” to escape the requirements of the legislation.20 This chart illustratesthe expert response to the question: “Do you think that the cigarette manufacturers willmove production overseas to escape the requirements of the (domestic content) legislation?”(Refer to Appendix A, “Tobacco Questionnaire, Question 12.)


This chart shows that 74% of the surveyed experts feel that the cigarette manufacturers willmove operations “off-shore.” This is extremely important for future burley quotas becausemost believe that significantly less U.S. grown tobacco will be used in these cigarettes.

84.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

Will Cigarette Production “Move” Off-Shore Due to DCL?

Yes74%

No26%

n = 23

85

If some cigarette manufacturing is moved “off-shore,” how much is likely to be moved?Accordingly, this chart provides the expert response to the question: “How muchproduction do you think will be moved outside the U.S. over the next 10 years (in terms ofnumbers of cigarettes)?” (Refer to Appendix A, “Tobacco Questionnaire, Question 13a.)

The summary statistics derived from the expert response are listed in Appendix B, TableB.1, “Summary Statistics on Questionnaire Results,” Question 13a.

This chart lists the first quartile (Q1) value (0), the median (100), and the third quartile (Q3)value (175).

85.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

How Much Production is Likely to “Move” Off-Shore?

0

1

2

3

4

5

6

7

0 1 50 70 100 125 140 150 175 200 210 250

Cigarettes (billions)

Fre

quen

cyQ1 = 0

median = 100Q3 = 175

86

As previously indicated, most believe that the cigarettes produced “off-shore” will use lessU.S. grown tobacco than would be otherwise used in manufacturing in the United States.This chart presents the expert response to the question: “Compared to the amount of U.S.leaf that is used currently in the production of these cigarettes (about 60%), how much U.S.leaf will be used if production is moved overseas (percent)?” (Refer to Appendix A,“Tobacco Questionnaire, Question 13b.)

The summary statistics derived from the expert response are listed in Appendix B, TableB.1, “Summary Statistics on Questionnaire Results,” Question 13b.

This chart lists the first quartile (Q1) value (16%), the median (25%), and the third quartile(Q3) value (29%).

86.(178&.<�/21*�7(50�32/,&<�5(6($5&+�&(17(5

How Much U.S. Leaf Will Be in These Cigarettes?

0

1

2

3

4

5

0% 5% 15% 20% 25% 30% 40% 60%Percentage of U.S. Grown Leaf

Fre

quen

cy

Q1 = 16%median = 25%

Q3 = 29%

87

APPENDIX EQUANTITATIVE MODEL USED TO GENERATE SCENARIOS

The model used to generate the alternative scenarios is displayed in Appendix E. The"most probable" scenario is presented in this example. Some numbers appear in bold. These areparameters derived from the expert questionnaire.

• Cells B10:B13 reflect the assumed distribution of Kentucky’s burley (Appendix D, p. 73).• Cells D18:M18 show an assumed 11% decline in consumption occurring as result of a tax

increase (for each of the years examined, see pp. 29 & 75).• Cells D19:M19 reveal how taxes are expected to impact other tobacco products such as

snuff, cigars, and pipe tobacco. It is assumed that a similar negative impact on consumptionwill occur. Accordingly, there is an 11% decline in consumption of "other," which isreflected ultimately in cells C13:M13.

• Cells D20:M20 show an annual rate of change of -3% in the number of Americans whosmoke (refer to p. 76).

• Cells D22:M22 indicate the annual rate of change of -3% in the annual rate of change in thenumbers of cigarettes consumed by smokers (see p. 77).

• Cells D26:M26 illustrate the expectation of 1.5% for the annual rate of change in cigaretteexports (see p. 78).

• Cells D27:M27 reflect the annual rate of movement necessary to transfer 100 billioncigarettes (see cell N30) off-shore from 1993 to 2003. The base line is 200 billion cigarettes(cell C29).

• Cells D28:M28 show the percentage of "previously" used (domestically grown) leaf in thesetransferred cigarettes. The number in this cell range is 41.7%, which is equal to 25% "U.S.content" (as opposed to 60%) in these cigarettes.

• Cells D32:M32 reflect the expert consensus that cigarette size will likely remain unchanged(refer to p. 80).

• Cells D36:M36 illustrate how the burley content in cigarettes will probably be stable at .75pounds (FSW) per 1,000 cigarettes (see p. 79).

• Cells C41:M41 and cells C46:M46 provide the domestic content for cigarettes manufacturedin the United States. The base line value is 60% (cells C41 & C46). Then the legislateddomestic content percentage of 75% is reflected for a three year period (refer to pp. 81-82).After this three year period, domestic content begins a gradual descent to 50% (cells M41 &M46) as evidenced by the expert consensus (refer to p. 82-83).

• Cells C51:M51 show the domestic content of the cigarettes that have been moved "off-shore."

• Cells D55:M55 demonstrate where exported leaf is likely to travel at an annual rate ofchange of -1.0% (refer to p. 84).

• Cells D58:M58 reflect a 0 to 1 million pound increase from 1993 to 2003 in the amount oftobacco required to fulfill the need generated by extended uses for tobacco.

• Cells C62:M92 give the pounds and percentages for the types of tobacco used in cigaretteproduction. The percentages reflected in cells C89:M92 are imposed on all three categoriesof cigarettes: 1) cigarettes manufactured in the U.S. and consumed domestically; 2) cigarettesproduced in the U.S. and consumed by foreigners; and 3) cigarettes moved "off-shore" andconsumed by foreigners.

Table E.1Quantitative Model Used to Generate Alternative Scenarios

Scenario Q2INITIAL CONDITIONSU.S. basic quota for burley tobacco in 1993 (million lbs.) 603KY basic quota for burley tobacco in 1993 (million lbs.) 406KY basic quota for dark tobaccos in 1993 (million lbs.) 26Burley as a percentage of Kentucky’s total tobacco. 94.0%

PercentageDISTRIBUTION OF KY BURLEY (1993 & Projected Values) Percent 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 ChangeCigarettes (domestically produced/domestically consumed) 48% 195.1 218.7 183.2 172.3 155.9 140.9 127.1 114.4 102.8 92.1 82.4 -57.8%Cigarettes (domestically produced/non-domestic consumption) 19% 77.2 90.4 86.2 82.2 75.5 69.2 63.3 57.9 52.8 48.1 43.6 -43.5%Exported unmanufactured leaf. 29% 117.9 116.7 115.5 114.4 113.2 112.1 111.0 109.9 108.8 107.7 106.6 -9.6%Burley used for other products & exported "cut rag" 4% 16.3 16.3 14.5 12.9 11.5 10.2 9.1 8.1 7.2 6.4 6.7 -58.8%

TOTAL 100% 406.5 442.1 399.3 381.8 356.1 332.4 310.5 290.2 271.5 254.3 239.3 -41.1%

Baseline Percentage

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Change

Impact of the proposed cigarette tax increase. n.a. 0.0% -11.0% -11.0% -11.0% -11.0% -11.0% -11.0% -11.0% -11.0% -11.0%

Excise tax on other tobacco products. n.a. 0.0% -11.0% -11.0% -11.0% -11.0% -11.0% -11.0% -11.0% -11.0% -11.0%Projected average annual change in the number of Americans who smoke. -3.0% -3.0% -3.0% -3.0% -3.0% -3.0% -3.0% -3.0% -3.0% -3.0%Baseline (1994) & projected number of Americans who smoke (in millions) 54 52.27524 50.71 49.19 47.710200 46.28 44.89 43.54 42.24 40.97 39.74 -26.3%Projected average annual change in the average cig. consumption among SMOKERS. -3.0% -3.0% -3.0% -3.0% -3.0% -3.0% -3.0% -3.0% -3.0% -3.0%Average annual consumption among smokers (cigarettes) 9,240.7036 8,963.4825 8,695 8,434 8,180.7285 7,935 7,697 7,466 7,242 7,025 6,814 -26.3%Average annual consumption among smokers (packs per day) 1.26 1.23 1.19 1.15 1.12 1.09 1.05 1.02 0.99 0.96 0.93 -26.3%Baseline (1994) & projected cigarettes consumed by Americans (in billions) 498.000 468.5682 392.37948 369.18985 347.37073 327 308 289 272 256 241 -51.6%Cigarette exported for foreign consumption (annual percentage change) n.a. 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%Annual rate of movement "off-shore." -6.0% -6.0% -6.0% -6.0% -6.0% -6.0% -6.0% -6.0% -6.0% -6.0%Percentage of previously used leaf. 41.7% 41.7% 41.7% 41.7% 41.7% 41.7% 41.7% 41.7% 41.7% 41.7%U.S. produced cigarettes consumed by foreigners (gross) 200 203 194 185 176 168 160 153 146 139 132Cigarette production moved off-shore (12) (12) (11) (11) (10) (10) (9) (9) (8) (8) (100.0)Cigarettes consumed by foreigners that are produced in the U.S. (net) 200 191 182 173 165 158 150 143 137 131 124 -37.8%Percentage change in cigarette size (e.g., tobacco displaced by stem, filter, etc.) n.a. 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%Total Farm-Sales-Weight (FSW) lbs. per 1,000 cigarettes 1.95 1.95 1.95 1.95 1.9500000 1.95 1.95 1.95 1.95 1.95 1.95 0.0%

Leaf distribution in cigarettes.

Flue-cured (FSW lbs. per 1,000 cigarettes) 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.87 0.0%Burley (FSW lbs. per 1,000 cigarettes) 0.75 0.750 0.750 0.750 0.750 0.750 0.750 0.750 0.750 0.750 0.75 0.0%Maryland (FSW lbs. per 1,000 cigarettes) 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.03 0.0%Oriental (FSW lbs. per 1,000 cigarettes) 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.30 0.0%TOTAL 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Domestic Content (U.S. Consumed Cigarettes)

Domestic content of cigarettes manufactured in the U.S. (percentage) 60% 75% 75% 75% 71% 68% 64% 61% 57% 54% 50%Total FSW of domestic tobacco (mil. lbs.) 583 685 574 540 484 432 386 343 303 268 235Total FSW of domestic burley tobacco (mil. lbs.) 247.3 277.2 232.1 218.4 197.6 178.6 161.0 145.0 130.2 116.7 104.4Percentage change 12% -16% -6% -10% -10% -10% -10% -10% -10% -11%

Domestic Content (Foreign Consumed Cigarettes)

Domestic content of cigarettes manufactured in the U.S. (percentage) 60% 75% 75% 75% 71% 68% 64% 61% 57% 54% 50%Total FSW of domestic tobacco (mil. lbs.) 234 279 266 254 230 209 189 170 152 136 121Total FSW of domestic burley tobacco (mil. lbs.) 99.3 116.2 110.8 105.7 97.0 89.0 81.5 74.4 67.9 61.8 56.1Percentage change 17% -5% -5% -8% -8% -8% -9% -9% -9% -9%

88

Table E.1Quantitative Model Used to Generate Alternative Scenarios

Domestic Content (Cigarettes that were moved overseas)

Domestic content of cigarettes manufactured in the U.S. (percentage) 60% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25%Total FSW of domestic tobacco (mil. lbs.) 5.98 5.71 5.44 5.19 4.95 4.72 4.50 4.29 4.09 3.90Total FSW of domestic burley tobacco (mil. lbs.) 3.4 3.2 3.1 2.9 2.8 2.7 2.5 2.4 2.3 2.2

Unmanufactured leaf exports (percentage change) -1.0% -1.0% -1.0% -1.0% -1.0% -1.0% -1.0% -1.0% -1.0% -1.0%Unmanufactured leaf exports (million lbs.) 117.9 116.7 115.5 114.4 113.2 112.1 111.0 109.9 108.8 107.7 106.6 -9.6%

Extended Uses: Projected total (from all sources) increase over current (1993) usage (mil. lbs.) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.00

TOTAL TOBACCO USED FOR DOMESTIC CONSUMPTION (cigarettes) 971.1 913.7 765.1 719.9 677.4 637.3 599.7 564.2 530.9 499.5 470.0DOMESTIC TOBACCO 582.7 685.3 573.9 539.9 483.8 432.5 385.5 342.6 303.4 267.6 235.0Flue-cured 297.3 327.7 274.4 258.2 234.5 212.7 192.6 174.2 157.2 141.7 127.4Burley 247.3 277.2 232.1 218.4 197.6 178.6 161.0 145.0 130.2 116.7 104.4Maryland 14.9 14.1 11.8 11.1 10.4 9.8 9.2 8.7 8.2 7.7 7.2FOREIGN TOBACCO 388.4 228.4 191.3 180.0 193.5 204.9 214.2 221.7 227.5 231.9 235.0Flue-cured 136.0 79.9 66.9 63.0 67.7 71.7 75.0 77.6 79.6 81.2 82.2Burley 126.2 74.2 62.2 58.5 62.9 66.6 69.6 72.0 73.9 75.4 76.4Oriental 126.2 74.2 62.2 58.5 62.9 66.6 69.6 72.0 73.9 75.4 76.4TOTAL TOBACCO USED FOR FOREIGN CONSUMPTION (cigarettes) 390.0 371.9 354.7 338.3 322.6 307.7 293.4 279.8 266.8 254.5 242.7DOMESTIC TOBACCO 234.0 278.9 266.0 253.7 230.4 208.8 188.6 169.9 152.5 136.3 121.3Flue-cured 119.4 133.4 127.2 121.3 111.7 102.7 94.2 86.4 79.0 72.2 65.8Burley 99.3 112.8 107.6 102.6 94.1 86.2 78.8 71.9 65.5 59.5 53.9Maryland 6.0 5.7 5.5 5.2 5.0 4.7 4.5 4.3 4.1 3.9 3.7FOREIGN TOBACCO 156.0 93.0 88.7 84.6 92.2 98.9 104.8 109.9 114.4 118.2 121.3Flue-cured 54.6 32.5 31.0 29.6 32.3 34.6 36.7 38.5 40.0 41.4 42.5Burley 50.7 30.2 28.8 27.5 30.0 32.1 34.1 35.7 37.2 38.4 39.4Oriental 50.7 30.2 28.8 27.5 30.0 32.1 34.1 35.7 37.2 38.4 39.4TOTAL TOBACCO USED FOR BLENDED CIGARETTES IN OFF-SHORE PRODUCTION 23.9 22.8 21.8 20.7 19.8 18.9 18.0 17.2 16.4 15.6DOMESTIC TOBACCO 6.0 5.7 5.4 5.2 4.9 4.7 4.5 4.3 4.1 3.9Flue-cured 4.4 4.2 4.0 3.8 3.6 3.5 3.3 3.2 3.0 2.9Burley 3.4 3.2 3.1 2.9 2.8 2.7 2.5 2.4 2.3 2.2Maryland 0.4 0.4 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.2FOREIGN TOBACCO 17.9 17.1 16.3 15.6 14.8 14.1 13.5 12.9 12.3 11.7Flue-cured 6.3 6.0 5.7 5.4 5.2 5.0 4.7 4.5 4.3 4.1Burley 5.8 5.6 5.3 5.1 4.8 4.6 4.4 4.2 4.0 3.8Oriental 5.8 5.6 5.3 5.1 4.8 4.6 4.4 4.2 4.0 3.8Flue-cured (percentage) 44.6% 44.6% 44.6% 44.6% 44.6% 44.6% 44.6% 44.6% 44.6% 44.6% 44.6%Burley (percentage) 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5% 38.5%Maryland (percentage) 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%Oriental (percentage) 15.4% 15.4% 15.4% 15.4% 15.4% 15.4% 15.4% 15.4% 15.4% 15.4% 15.4%

89

91

SELECTED BIBLIOGRAPHY

Ag. Project 2000: A Comprehensive Master Plan for Kentucky Agricultural EconomicDevelopment.

Becker, Gary S., Michael Grossman, and Kevin M. Murphy, “An Empirical Analysis of CigaretteAddiction,” The American Economic Review, June 1994.

Community Farm Alliance, Investing In The Farms And Communities Of America’s TobaccoRegions, November 1993 draft.

Creek, Laverne, Tom Capehart, and Verner Grise, U.S. Tobacco Statistics, 1935-92, UnitedStates Department of Agriculture, Statistical Bulletin Number 869.

Delman, Farrell, Thomas Slane, and Michael Marion (editors). Current Issues in TobaccoEconomics, Tobacco Merchants Association of the United States, Inc., economic papersgiven at the 34th Tobacco Workers Conference, Charleston, South Carolina, January 7-10,1991.

Kentucky Agricultural Statistics Service, Kentucky Agricultural Statistics, 1992-1993.

Snell, William M. and Steven G. Isaacs, Examining the Economic Impact of Higher Excise Taxeson the U.S./Kentucky Burley Tobacco Industry, University of Kentucky, College ofAgriculture, February 1994.

Southern Technology Council, "Enlarging the Economic Pie for Tobacco," Regional Forum, Vol.7, No. 1, Fall 1993.

U.S. Department of Agriculture, "Tobacco Economies: What's Ahead?," Agricultural Outlook,September 1993.

U.S. Department of Health and Human Services, Preliminary Estimates from the 1992 NationalHousehold Survey on Drug Abuse, Advance Report Number 3, June 1993.

Womach, Jasper. "Economic Assistance for Tobacco Production regions to Offset Losses fromHigher Cigarette Taxes?," Congressional Research Service, Memorandum, March 22, 1994.

michael t. childress 1994cigarette consumption, declining levels of domestic content in u.s....

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